Japan Fiscal 2026 Budget Surplus Target: Takaichi’s Gamble Against Rising Rates

Japan's long-awaited 'black ink' is finally within reach—or is it? Prime Minister Sanae Takaichi's cabinet just unveiled a draft budget for fiscal 2026 that targets a primary surplus for the first time in nearly three decades. Yet, the markets aren't celebrating just yet.

The preliminary figures show a modest general-account primary surplus, marking a turning point from a deficit era that began after fiscal 1998. According to Nikkei, this milestone isn't guaranteed. With long-term interest rates climbing, investors are questioning whether the government can truly manage its massive debt pile while fueling economic growth.

Japan Fiscal 2026 Budget Surplus: Reality or Mirage?

Prime Minister Takaichi is talking tough on debt as bond yields spike. The draft assumes a 3% bond interest rate, but the reality on the ground is volatile. The government has already enacted an 18 trillion yen extra budget for expansionary stimulus, raising concerns about the sincerity of its fiscal tightening.

The Rising Cost of Debt Servicing

Borrowing costs are the elephant in the room. Experts warn that if benchmark yields surge to 2.5%, Japan's borrowing costs could double. This comes at a time when defense spending is set to balloon, although only 10% of that increase is earmarked for manpower, with the rest going toward equipment. The tug-of-war between spending promises and fiscal reality is putting Takaichi in a tight spot.