The Japanese government is walking a tightrope between stimulating economic growth, expanding fiscal spending, and containing debt risks, a Japanese expert said on Wednesday.
Japan's real gross domestic product (GDP) grew 0.3 percent quarter-on-quarter in the second quarter of 2026, the Cabinet Office said in a preliminary report on Aug 17. Meanwhile, yields on Japanese long-term government bonds have continued to climb. The rise in long-term interest rates signals further increases in the government's future interest payments. Japan's Ministry of Finance has already raised the assumed interest rate for the fiscal 2027 budget to 3.8 percent, up from the previous 3 percent.
Kodama Yuichi, chief economist fellow at the Meiji Yasuda Research Institute, noted that as high interest rates gradually feed through to government bonds due for refinancing, Japan's fiscal space may come under further pressure.
"If this high interest rate continues, the interest expense will continue to increase every year in the future. The interest expense in the new annual budget is about 16 trillion yen (about 100 billion U.S. dollars). At present, as the budgetary estimate of the new annual budget requires, it seems that the figure may exceed 130 trillion yen (about 820 billion U.S. dollars). Thus, as indicated by this figure, interest expenditure accounts for nearly 10 percent. If this proportion continues to expand, other expenditures are likely to be squeezed, and it is necessary to be wary that it may have fallen into an intractable situation by the time when problems emerge," Kodama said.
"In terms of financial operation, the [Sanae] Takaichi government regards the proportion of government debt to the GDP as an important goal, but the problem with this goal lies in the proportion of government debt balance to the GDP. The change period is very long. In the next two or three years, we can actually see the improvement trend of this indicator. However, if interest expenditure keeps increasing in this process, interest expenditure may expand greatly in five or six years, and the proportion of government debt balance to the GDP may deteriorate again," Kodama said.
He also warned that if Japan's defense spending continues to increase, it will also worsen Japan's overall financial management. "The increase in the defense expenditure is indeed one of the factors. Among all kinds of expenditure items, the defense expenditure represents one of the biggest increases. The market is not only worried about the defense expenditure itself, but I think what the market is really worried about is that the overall financial situation of Japan, including the defense expenditure, is deteriorating. Therefore, it has become very difficult to manage the overall financial situation in the future," he said.
"In addition, rising prices may continue in the second half of this year, due to the impact of the previous increase in crude oil prices. At present, it is still in the process of transmitting the price to the final consumer, so I think personal consumption is likely to remain weak in the second half of this year," he added.
Japan's economic growth slows as fiscal expansion weighed by debt pressure: expert
