Japan's budget demands hit record $831 billion as political uncertainty increases

Japan's budget requests for the next fiscal year set a record for the third consecutive year, the finance ministry said on Wednesday, amid growing market concern that political wrangling within the ruling party may hurt the country's fiscal health.

The combined 122.45 trillion yen ($831.13 billion) budget requests from government agencies highlight the struggle of streamlining spending for the industrial world's most heavily indebted country.


The requests were driven by record debt-servicing costs and record defence spending, while social security outlays also continue to rise to support Japan's fast-ageing society.

The budget may be inflated further as some items have been requested without an amount being specified, while local media reported Prime Minister Shigeru Ishiba plans to ask ministers to compile an economic stimulus package to be funded by an extra budget.

Growing uncertainty over Ishiba's political fate could also weaken the government's grip on spending.

On Tuesday, some of Ishiba's senior aides at the ruling Liberal Democratic Party (LDP), including Secretary-General Hiroshi Moriyama, offered to resign from key leadership positions to take responsibility for the party's defeat in the July 20 upper house election.

Moriyama, a close ally of Ishiba and a key stabilizing figure within the party, has played a central role in helping the prime minister maintain his fiscal hawkish stance despite growing pressure from opposition lawmakers calling for tax cuts and expanded subsidies.

Market worries about the expansion of government spending, coupled with globally rising long-dated bond yields, sent the 30-year yield on Japanese government bonds to all-time highs this week.

Ishiba's administration will face its biggest test when the LDP will decide on September 8 whether to hold a race to choose a new party leader. Majority support would allow the party to proceed with a leadership contest, potentially unseating Ishiba before his term ends in 2027.

Even if the LDP decides against holding an early leadership election, Ishiba looks likely to find himself in a challenging position as he may struggle to appoint successors to key party posts, Mizuho Securities economists said in a report.

A change in LDP leadership could boost Japanese equities, the report said, while the bond market's reaction would depend on who emerges as the most likely successor.

A Jiji Press poll last month ranked former economic security minister Sanae Takaichi as the most popular candidate, with 15.9% support nationwide. The bond market views Takaichi's reflationary stance with caution.