Japan’s government faces a record debt-servicing burden in fiscal 2027, as expansionary fiscal policy collides with rising interest rates to push bond redemption and interest costs past ¥36 trillion.

According to Nikkei, Japan’s Ministry of Finance plans to allocate ¥36.6 trillion (approximately $230.3 billion) for debt-service costs—principal redemption and interest payments on Japanese Government Bonds—in its fiscal 2027 (April 2027–March 2028) budget request. That is ¥5.3 trillion (approximately $33.3 billion) more than the previous record set in the initial fiscal 2026 budget, representing a 17% increase—the steepest in two decades.

The direct driver is rising interest rates. The assumed interest rate used to calculate JGB interest payments has been raised to 3.8% for fiscal 2027, up from 3.0% in the fiscal 2026 budget. The adjustment reflects inflation, expectations of further rate hikes by the Bank of Japan, and fiscal-sustainability concerns surrounding the expansionary stance of Prime Minister Sanae Takaichi’s cabinet.

Japan’s long-term yields are already climbing rapidly. On the 18th, the benchmark 10-year JGB yield rose to 2.945% in the Japanese bond market—its highest level in about 30 years—with market participants discussing the possibility of a move above 3%. Nikkei noted that since the assumed rate is finalized during year-end budget deliberations, further increases in market yields could push debt-service costs even higher.

The core problem is a vicious cycle. Fiscal-deterioration concerns drive JGB yields higher, and higher yields in turn raise interest costs, further weakening fiscal health. The burden compounds as bonds issued during the prolonged low-rate era mature and are rolled over into new debt at higher rates.

Pressure is also mounting across the broader budget. Total budget requests from Japanese government ministries for fiscal 2027 are expected to exceed a record ¥130 trillion (approximately $817.9 billion). With debt-service costs consuming nearly 30% of that total, less funding will be available for growth investment, welfare, defense spending, and other priorities.

Financing the Takaichi cabinet’s policy agenda has emerged as another challenge. Estimates suggest that new funding needed for priority measures—including growth-sector investment, increased defense spending, and a temporary food consumption tax cut—could exceed ¥10 trillion (approximately $62.9 billion). The government plans to secure resources through higher tax revenue, non-tax income, and spending reviews.

However, the Cabinet Office’s medium-to-long-term projections show fiscal 2027 tax revenue at ¥90.5 trillion (approximately $569.4 billion), up ¥6.8 trillion (approximately $42.8 billion) from the fiscal 2026 forecast—but insufficient to cover both rising debt-service costs and new policy spending, analysts say.

Japan’s national debt reached 204.4% of GDP as of last year, the highest among major advanced economies. That said, because most of the debt is yen-denominated and held predominantly by domestic investors including the Bank of Japan and Japanese financial institutions, the risk of external default is considered relatively lower than for countries with large foreign-currency debt burdens.