August 7, 2026
TOKYO – The nation’s budget compilation process will change significantly from fiscal 2027.
Supplementary budgets have become commonplace in recent years, but from next year the government plans to include these spending measures in the initial budget. The government also will introduce a new investment framework designed to boost investment in 17 strategic fields, including semiconductors and artificial intelligence. The government also is preparing to curb the issuing of government bonds, but it could prove difficult to balance economic growth and fiscal consolidation.
In a post on X on June 30, Prime Minister Sanae Takaichi indicated she was determined to reform the budget compilation process. She said she wanted to make a “fundamental shift” to a new kind of economic and fiscal management. This reform, Takaichi wrote, would lead to a “strong economy.”
The typical budget compilation process involves ministries and agencies submitting their budget requests to the Finance Ministry during the summer, and the cabinet approving the budget around December. Under the Public Finance Law, a supplementary budget can be drawn up, but this is mainly for “urgent expenses.” However, the government has formed a habit of compiling a supplementary budget worth several trillion yen tying in with its economic policies every autumn.
General account expenditures in the fiscal 2025 initial budget reached ¥115.2 trillion. However, the Cabinet approved an ¥18.3 trillion supplementary budget in November, of which about 60% was financed by newly issued government bonds. Supplementary budgets in recent years have included many outlays that ordinarily should have been included in the initial budget, such as financial support for the development of advanced semiconductors. Some observers have said that scrutiny of items in supplementary budgets has become less stringent than of those in initial budgets.
From fiscal 2027, which starts in April 2027, such policy-related expenditures will, in principle, be allocated in the initial budget. In a move aimed at boosting fiscal transparency, supplementary budgets will be restricted to urgent situations such as dealing with the aftermath of a major disaster. The government does not plan to issue more bonds for these budgets.
Special treatment for some investments
Core to these changes is the creation of an investment framework for a “stronger and more prosperous Japan.” The budget for this framework will be separate from regular spending and will prioritize programs that are expected to raise the growth rate, especially in 17 strategic fields. This new system will in general be for multiyear programs, allowing for greater predictability in implementing them. The government hopes this will make it easier to attract private-sector investment in these fields.
Each summer, the government decides the guidelines for budget requests by ministries and agencies. However, the government will abolish the ceiling on these requests under the investment framework. The government also will allow requests to be submitted that do not specify a total monetary amount.
Investment in fields especially important for economic security will be managed separately to secure funds spanning multiple fiscal years. A new special account will be created, and the government will issue “bridging bonds” backed by a secure repayment source to raise investment funds. These funding sources will be decided at a later date.
A separate account is already being used for some sectors, including decarbonization, AI and semiconductors. The government has issued “GX economy transition bonds” to finance investment in “green transformation” projects that help the shift from fossil fuels to clean energy. Income from a yet-to-be-implemented carbon pricing system will be allocated to redeeming these bonds.
Each program put forward by ministries and agencies for budget requests under the new investment framework will be assessed and, if deemed important for economic security, handled separately. All other items will be booked under the general account.
The government has so far been flexible in contributing money to projects that span multiple years, drawing on funds from the state budget. Following criticism that huge sums of money were being set aside for such spending during the COVID-19 pandemic, the government in 2024 decided budget allocations could only cover up to three years.
Under the upcoming changes, this “three-year rule” would be axed for funds connected to domestic investment, provided the policy’s effects can be evaluated and other conditions are met. Long-term budgets will be secured in some fields for projects that will take considerable time before their impact becomes apparent.
“By concentrating on truly effective policies, we will transform the budget into something that helps strengthen the nation’s growth potential,” Takaichi said.
Changing criteria
In the past, governments have sought to achieve a primary balance surplus for central and local governments on a single-year basis. The Takaichi administration has instead sought to steadily lower the government debt-to-GDP ratio, and plans to set new, attainable goals for the size of the budget and the issuing of new government bonds.
The debt-to-GDP ratio will fall if growth in nominal GDP eclipses the growth in government debt. Consequently, the government aims to expand GDP through growth investments. Since bridging bonds are excluded from calculations of outstanding debt, investments in economic security will not impact the government’s fiscal objectives.
Nonetheless, long-term interest rates on the Tokyo bond market briefly reached a roughly 30-year high on July 3. This suggests concerns remain about the Takaichi administration’s “proactive” fiscal policy.
“The government should establish rules to review the effectiveness of these investments,” said Takuya Hoshino, senior economist at Daiichi Life Research Institute Co. “The government should conservatively estimate growth rates and interest rates, and then formulate the budget.”