Prime Minister Sanae Takaichi answers questions from reporters at the Prime Minister’s Office in Tokyo on May 25, 2026. Prime Minister Sanae Takaichi announced on May 25 that the government would create a supplementary budget of $19 billion to support households suffering from soaring living costs due to the Iran war. (Photo provided by Jiji Press / AFP via Getty Images) / Japan OUT
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Prime Minister Sanae Takaichi is formulating a supplementary budget to support household living expenses, but there are doubts as to whether he will be able to keep his pledge regarding the issuance of national bonds.
The budget was approximately 3 trillion yen ($19 billion), roughly in line with market expectations, but was compiled at a time when Japan is still struggling with soaring energy prices, rising subsidy costs, and a weak yen.
The budget also represents a reversal from the previous position that no additional spending was necessary. He also said that total government debt issuance for calendar year 2026 will remain unchanged from the original budget plan, according to Bloomberg.
Mr. Takaichi has sought to allay concerns in the bond market by saying that additional spending can be covered by issuing deficit-deficit bonds. but, 10 year Japanese government bond The yield rose to 2.809% on May 20, its highest level since 1996, following reports that the government may issue new bonds to fund the additional budget.
“A lot can happen in the bond market, but it’s not stupid,” said Jesper Cole, expert director at Tokyo-based financial services firm Monex Group. “You cannot increase spending without increasing debt.”
Takaichi’s use of the calendar year time frame has caught the attention of Japan watchers.
“Nobody in Japan has ever made policy based on the calendar year. If there’s a red flag, that’s a red flag,” Koll said, noting that Japan’s fiscal calendar historically ends on March 31st.
In addition to rising to the highest level in 40 years for the first time in 10 years, 30 year yield It has exceeded 4%, reflecting growing concerns about fiscal risks as well as inflationary pressures.
“Recent developments such as continued uncertainty in the Middle East, rising commodity prices and increased fuel subsidy spending have led to bond market concerns about Japan’s fiscal position this year,” said Louis Chua, equity research analyst for Asia at Julius Baer.
Koll said investors might have been more confident if the government had openly announced a 10 trillion yen budget proposal, funded by 10 trillion yen in government bonds, instead of a smaller package with a guarantee that no additional issuance would be made.
“The first one, actually, people believe,” Coll said. “No one will believe the second one.”
However, not all analysts see this package as disruptive.
State Street Investment Management remains “structurally bullish on Japan on both the economy and the market,” said APAC economist Krishna Bhimavarapu. “The supplementary budget looks less like a broad stimulus package and more like a relief package aimed at households facing energy price pressures related to the Iran conflict.”
“It’s not about large-scale demand stimulation, it’s about staying consistent with Prime Minister Takaichi’s philosophy,” he added.
Recent data strengthens that view. The economy expanded at an annual rate of 2.1% in the first quarter, and real GDP increased by 0.5% from the previous quarter. Exports in April increased by 14.8% compared to the same month last year, supported by strong semiconductor shipments and AI-related demand.
Even Koll sees stocks continuing to trend higher, thanks to corporate restructuring, record mergers and acquisitions, activist investors, private equity and domestic business investment.
However, the calculations are different for bonds and yen. The currency remains at around $160 against the dollar, an area often seen as a potential trigger for intervention.
As for the bond market, Cole said it appears to reflect an “increasing certainty” of inflation, Bank of Japan rate hikes and increased bond supply.
