Japan’s Debt-Service Costs to Hit Record ¥36.6 Trillion in Fiscal 2027

Debt-service costs to reach a record ¥36.6 trillion next year

Projected to surge 17% in a year as interest rates rise

Japan’s debt-service burden is poised to climb to a record next year, as the government faces rising costs to repay principal and interest on its bonds. Expansionary fiscal policy and higher interest rates are expected to push the bill above ¥36 trillion.

Japan’s Finance Ministry plans to set debt-service costs at ¥36.6 trillion in its budget request for fiscal 2027, the Nikkei reported on Aug. 23. That amounts to about $230 billion. The total is ¥5.3 trillion higher than the initial debt-service allocation in the fiscal 2026 budget, a 17% increase and the steepest rise in the past 20 years.

Higher interest rates are driving the jump. The assumed rate used to calculate interest payments on government bonds rose to 3.8% for fiscal 2027 from 3.0% in the fiscal 2026 budget. The increase reflects inflation, expectations for additional Bank of Japan rate hikes and concerns about fiscal discipline under Sanae Takaichi’s expansionary policy stance.

Japan’s long-term yields have already risen sharply. On Aug. 18, the benchmark 10-year Japanese government bond yield climbed to 2.945%, the highest level in about 30 years. Markets are also discussing the possibility of a move above 3%.

The risk is a vicious cycle. Concerns about worsening public finances can drive up government bond yields, while higher yields raise interest costs and further weaken fiscal health. The burden would grow further as bonds issued during years of ultra-low rates mature and are refinanced at higher yields.

That is also set to increase pressure on the budget. Budget requests from Japan’s ministries and agencies for fiscal 2027 are expected to exceed a record ¥130 trillion. If debt-service costs account for nearly 30% of that total, less money will be available for growth investment, welfare and defense.

Funding the Takaichi cabinet’s policy agenda has also emerged as a challenge. New financing needs for investment in growth sectors, higher defense spending and a temporary cut in the food consumption tax could exceed ¥10 trillion, the report said.

The government plans to secure funding through higher tax revenue, non-tax income and a review of spending. But Cabinet Office medium- to long-term projections show fiscal 2027 tax revenue at ¥90.5 trillion, only ¥6.8 trillion more than the fiscal 2026 estimate. That would not be enough to cover both rising debt-service costs and new policy spending, according to the report.

Japan’s national debt stood at 204.4% of gross domestic product last year, the highest among major advanced economies. Still, the risk of an external payment default is considered relatively low because most of the debt is denominated in yen and a large share is held by domestic investors, including the Bank of Japan and Japanese financial institutions.

Lee Song-ryeol, Hankyung.com reporter yisr0203@hankyung.com