Japan’s Record $783 Billion Budget: A High-Stakes Bet Against Rising Rates

Japan's debt mountain just got taller. On December 26, 2025, Prime Minister Sanae Takaichi’s cabinet approved a record 122 trillion yen ($783 billion) budget for fiscal 2026. It’s a massive gamble that tries to stoke economic growth while ignoring the alarm bells of fiscal discipline.

The End of Cheap Debt

According to Nikkei, the draft budget assumes a bond interest rate of 3%. This is a significant shift. For decades, Japan operated in a near-zero interest environment. Now, the government's bracing for a reality where borrowing actually costs money. If benchmark yields surge to 2.5%, borrowing costs could double, putting immense pressure on the national treasury.

The Bank of Japan (BOJ)’s recent rate hikes are forcing households and corporations to rethink their debt. The government isn't exempt from this trend. Despite the risks, Takaichi is doubling down on spending to maintain economic momentum amid persistent inflation.

Where is the Money Going?

The 2026 budget includes $46 billion earmarked for supporting investments in the US and nuclear power sectors. To fund these ambitions, Japan plans to issue $74 billion in new debt. It’s a move that has markets on edge, wondering if Japan's fiscal discipline is a thing of the past.