Japan's FY2027 general account budget requests may exceed JPY130trn, with the debt-servicing request rising to JPY36.6trn

Overview

The report analyzes the potential scale of Japan's FY2027 general account budget requests, focusing on increases in requests by ministry, debt-servicing costs, and the assumed interest rate. Nomura believes total requests may broadly reach or exceed the author's estimate, with requests from large ministries that have yet to disclose their figures and adjustments to the year-end interest-rate assumption representing the main variables.

Core views

The report first notes that total FY2027 general account budget requests are expected to exceed JPY130trn. The author previously estimated FY2027 general account expenditures at JPY139.5trn; including items managed separately under special accounts, the estimate is JPY141.5trn. Therefore, total requests exceeding JPY130trn would not in itself be surprising; the real question is how far above JPY130trn the final amount will be. If total requests reach JPY141.5trn, they would be approximately JPY19trn higher than the FY2026 request amount of JPY122.4trn. Based on disclosed ministry data, the Ministry of Economy, Trade and Industry is requesting JPY7.7trn, including special accounts; the Ministry of Internal Affairs and Communications is requesting JPY21.9trn; the Ministry of Education, Culture, Sports, Science and Technology is requesting JPY8.7trn; the Ministry of Defense is requesting JPY8.9trn; and the Ministry of Finance is requesting JPY36.6trn for debt-servicing costs. Compared with FY2026 request amounts, these ministries' requests have increased by JPY5.7trn, JPY2.8trn, JPY2.6trn, JPY0.1trn, and JPY4.2trn, respectively, for a combined increase of approximately JPY16trn. Because some ministry figures include special-account items, the comparison is not entirely like-for-like; however, if requests from the remaining ministries increase by JPY3trn in aggregate from the previous year, the final total request amount could exceed the author's estimate. Large ministries that have not yet announced their request amounts provide further upside potential. The Ministry of Health, Labour and Welfare's FY2026 request amount was JPY34.8trn, the Ministry of Land, Infrastructure, Transport and Tourism's was JPY7.1trn, and the Ministry of Agriculture, Forestry and Fisheries' was JPY2.7trn. The report believes that if national resilience expenditures previously included in supplementary budgets are requested from the initial stage, the Ministry of Land, Infrastructure, Transport and Tourism's request could increase by JPY2–3trn. The Ministry of Health, Labour and Welfare's budget includes social security expenditures; if these align with the author's estimate for social security-related spending, they could increase by approximately JPY0.7trn. Based on these increases, total budget requests may ultimately broadly equal or exceed the author's estimate. Debt-servicing costs are the second core line of analysis. The Ministry of Finance is coordinating a JPY36.6trn request for debt-servicing costs. Normally, half of the previous fiscal year's general account net surplus is included in the request as debt-redemption expenditure, but in practice this net surplus often becomes a funding source for supplementary budgets, and the initial budget generally does not retain debt-redemption expenditure equal to the net surplus. The JPY36.6trn figure may include JPY1.3trn, equivalent to half of the FY2025 fiscal settlement surplus. If a second supplementary budget is prepared for FY2026 and uses this surplus, the effective debt-servicing cost request would be approximately JPY35.3trn. Even using the adjusted figure of JPY35.3trn, it would still be approximately JPY4trn higher than the FY2026 debt-servicing cost request of JPY31.3trn after excluding the portion equivalent to the net surplus, and JPY0.8trn higher than the author's JPY34.5trn estimate for FY2027 debt-servicing costs. This indicates that debt-servicing items alone are already contributing a significant increase to the scale of FY2027 budget requests, although the use of the net surplus may still lead to adjustments between the request basis and the final initial budget. The report concludes by analyzing the interest-rate assumption. The assumed interest rate used for FY2027 debt-servicing costs is 3.8%, reportedly calculated by adding 1.1 percentage points to the prevailing market interest rate, implying an assumed market rate of 2.7%. If market interest rates subsequently rise, the assumed interest rate may be raised further when the initial budget is finalized at year-end, thereby increasing debt-servicing costs. However, an increase in the assumed interest rate affects only interest payments made during the year on interest-bearing bonds issued that year, so its near-term impact does not apply to the entire stock of outstanding debt. According to the Ministry of Finance's estimate, every 1 percentage point increase in the assumed FY2027 interest rate would raise interest payments for the year by JPY0.8trn. Applying this sensitivity, the report estimates that if the assumed interest rate is raised by 0.2 percentage points from 3.8% to 4.0%, FY2027 interest payments would increase by approximately JPY0.2trn. In FY2026, the assumed interest rate was also raised from 2.6% at the budget-request stage to 3.0% at the initial-budget stage, but debt-servicing costs in the final initial budget were almost identical to the requested amount after excluding the general account surplus, showing that an interest-rate increase does not necessarily cause the final total to rise by the full mechanical sensitivity amount.

Analysis framework

The report first uses the author's estimate of total FY2027 expenditures as a benchmark, then aggregates the disclosed request amounts and year-on-year increases by ministry and estimates the potential increases contributed by large ministries that have yet to announce their figures. It subsequently follows Japanese budget-preparation conventions by excluding from the debt-servicing request the net surplus that may be redirected to a supplementary budget, creating an effective figure suitable for comparison. Finally, it uses the interest-rate sensitivity provided by the Ministry of Finance to assess the impact of a year-end adjustment to the assumed interest rate on interest payments for the year and compares this with the actual FY2026 adjustment experience.

Methodology notes

• (Out-of-Vocabulary Method)

  Aggregation of budget requests by ministry and comparison of increases across fiscal years

  The report aggregates the disclosed FY2027 request amounts by ministry, calculates their increases relative to FY2026, and then estimates how much additional growth must come from ministries that have yet to disclose their figures to determine whether total final requests can reach or exceed the author's estimate.

• (Out-of-Vocabulary Method)

  Debt-servicing cost measure adjusted for net surplus

  The report considers that the previous fiscal year's net surplus may be used for a supplementary budget rather than retained as debt-redemption expenditure in the initial budget. It therefore excludes JPY1.3trn from the JPY36.6trn request amount to derive an effective comparable figure of JPY35.3trn.

• (Out-of-Vocabulary Method)

  Assumed interest-rate sensitivity analysis

  The report uses the Ministry of Finance's estimate that every 1 percentage point increase in the assumed interest rate would add JPY0.8trn to interest expenditures for the year to calculate the budget impact of raising the assumed interest rate from 3.8% to 4.0%, while explaining that the change affects only interest-bearing bonds newly issued during the year.

Key data

• Estimated FY2027 general account expendituresJPY139.5trnThe author's estimate of total general account expenditures
• Estimated FY2027 expenditures on an expanded basisJPY141.5trnIncludes items managed separately under special accounts
• FY2026 budget request amountJPY122.4trnIf FY2027 reaches JPY141.5trn, the increase would be approximately JPY19trn
• Ministry of Economy, Trade and Industry request amountJPY7.7trnIncludes special accounts; up JPY5.7trn from FY2026
• Ministry of Internal Affairs and Communications request amountJPY21.9trnUp JPY2.8trn from FY2026
• Ministry of Education, Culture, Sports, Science and Technology request amountJPY8.7trnUp JPY2.6trn from FY2026
• Ministry of Defense request amountJPY8.9trnUp JPY0.1trn from FY2026
• Combined increase for disclosed ministriesapproximately JPY16trnSome figures include special-account items and are not entirely comparable
• Potential increase for the Ministry of Land, Infrastructure, Transport and TourismJPY2–3trnDepends on whether national resilience expenditures are included in requests from the initial stage
• Potential increase for the Ministry of Health, Labour and Welfareapproximately JPY0.7trnAssumes social security-related expenditures align with the author's estimate
• Debt-servicing cost request amountJPY36.6trnUp JPY4.2trn from the FY2026 request basis
• Adjusted debt-servicing cost requestJPY35.3trnExcludes JPY1.3trn, equivalent to half of the FY2025 net surplus, from JPY36.6trn
• Adjusted FY2026 debt-servicing requestJPY31.3trnThe adjusted FY2027 figure is approximately JPY4trn higher
• Author's estimate of FY2027 debt-servicing costsJPY34.5trnThe adjusted request amount is still JPY0.8trn higher
• FY2027 assumed interest rate3.8%Reportedly derived by adding 1.1 percentage points to the 2.7% market interest rate
• Interest-rate sensitivityJPY0.8trn/1 percentage pointThe Ministry of Finance's estimate of the increase in FY2027 interest payments
• Impact of raising the assumed interest rate to 4.0%approximately JPY0.2trnThe report's estimated increase in FY2027 interest payments
• FY2026 assumed interest-rate adjustment2.6% to 3.0%Raised from the budget-request stage to the initial-budget stage

Impact & implications

The report believes that the approximately JPY16trn increase from disclosed ministries, combined with potential increases from ministries that have yet to disclose their figures, such as the Ministry of Land, Infrastructure, Transport and Tourism and the Ministry of Health, Labour and Welfare, is sufficient to bring total FY2027 budget requests close to or above the author's estimate. Debt-servicing costs are an important upward driver, but the ultimate use of the net surplus and year-end adjustments to the assumed interest rate will affect the conversion from request amounts to the initial budget; the effect of higher interest rates on current-year expenditures is mainly limited to interest-bearing bonds newly issued during the year.

Risks

• If market interest rates rise further before year-end, the assumed interest rate used in the FY2027 initial budget may exceed 3.8%, increasing debt-servicing costs.

What to watch

• Monitor how far the final total budget requests exceed JPY130trn and whether they reach or exceed the estimated range of JPY139.5trn to JPY141.5trn.
• Monitor request amounts from ministries that have yet to disclose their figures, including the Ministry of Health, Labour and Welfare, the Ministry of Land, Infrastructure, Transport and Tourism, and the Ministry of Agriculture, Forestry and Fisheries.
• Monitor whether national resilience expenditures shift from supplementary budgets to inclusion in the Ministry of Land, Infrastructure, Transport and Tourism's request from the initial stage.
• Monitor whether JPY1.3trn of the FY2025 net surplus is used for the second FY2026 supplementary budget.
• Monitor whether the FY2027 assumed interest rate is raised further from 3.8% when the initial budget is finalized at year-end.