Japanese Prime Minister Sanae Takaichi sought on Thursday to ease market concerns over her expansionary fiscal policy, saying the government's draft budget maintains discipline by limiting reliance on debt.
There has been growing investor unease about fiscal expansion under Takaichi's administration, which has driven super-long government bond yields to record highs and weighed on the yen.
The budget for the year starting in April, to be finalized on Friday and submitted to parliament early in 2026, will total 122.3 trillion yen ($785.4 billion), Takaichi told ruling coalition executives.
The huge spending will come on top of a 21.3 trillion-yen stimulus package, compiled in November and funded by a supplementary budget for the current fiscal year, that focused on cushioning the blow to households from rising living costs.
Despite the record size, new government bond issuance for the next fiscal year will be capped at 29.6 trillion yen, staying below 30 trillion yen for a second straight year, she said.
The reliance on debt will fall to 24.2% from 24.9% in the initial fiscal 2025 budget, which dipped below 30% for the first time in 27 years, she said. The 24.2% debt dependence ratio would be the lowest since 1998.
"We believe this draft budget strikes a balance between fiscal discipline and achieving a strong economy while ensuring fiscal sustainability," Takaichi said.
In a separate speech at Japanese business lobby Keidanren, Takaichi said that her "responsible, proactive" fiscal policy means strategic spending with a long-term perspective.
"It does not mean expanding expenditures indiscriminately based solely on scale," she said.
In a report to clients, Yusuke Matsuo, Mizuho Securities' senior market economist, said Takaichi would still need to promote proactive fiscal spending to avoid alienating her political base. He added that financial markets could be reassured if the government sticks to a less aggressive stance on spending.
Signaling a shift in the government's reflationary policy push, private-sector members of a government panel on Thursday called on the government to clearly show the public how the debt-to-gross domestic product ratio can be steadily reduced under Takaichi's government.
The four private-sector members include former Bank of Japan Deputy Governor Masazumi Wakatabe and economist Toshihiro Nagahama - known as reflationist aides of Takaichi.
Their proposals were discussed at the Council on Economic and Fiscal Policy (CEFP), which oversees Japan's fiscal blueprint and long-term economic policies.
