Japan's Military Buildup Collides with Fiscal Reality

Japan's government is facing a daunting fiscal challenge as it pursues military expansion and economic growth. According to a recent public opinion poll, the Sanae Takaichi cabinet's approval rating has fallen to 50.2 percent, its lowest level since she took office. Meanwhile, 71.7 percent of respondents expressed concern about Japan's fiscal health.

The proposed cut in the consumption tax on food from 8 percent to 1 percent is expected to leave a substantial hole in government revenue, with a complete elimination representing roughly 5 trillion yen ($2.32 trillion) per year in lost revenue. The Takaichi government has also announced a record 8.9 trillion yen military budget for fiscal year 2027, which is on track to exceed 10 trillion yen as additional appropriations pile on.

Japan's public debt burden is already one of the heaviest in the developed world, with the 10-year Japanese government bond yield climbing to its highest level in about three decades at 2.95 percent. The Japanese Finance Ministry has allocated 36.6 trillion yen for government-bond principal and interest payments in fiscal year 2027, a 17 percent increase from the previous year.