Chapter 2 2.16

Japan's Fiscal Governance: No Debt Ceiling

Understanding Japan's budget process and why it prevents fiscal deadlocks

Japan’s Approach: No Debt Ceiling, But Annual Budget Authorization

Japan does not have a debt ceiling. However, this doesn't mean unlimited borrowing—Japan's fiscal system has its own constraints and safeguards.

How Japan’s Budget Process Works

Stage Process Key Difference from U.S.
1. Budget Formulation
(Aug - Dec)		 Ministry of Finance compiles budget requests from all ministries and agencies. MOF negotiates spending priorities with political leadership. MOF has strong centralized control over budget preparation. In U.S., each agency submits requests to OMB with less coordination.
2. Cabinet Approval
(Late December)		 Cabinet approves draft budget, including JGB issuance plan. Prime Minister presents to public. Executive branch unified approval. In U.S., President submits budget but Congress often ignores it.
3. Diet Deliberation
(Jan - March)		 Budget submitted to National Diet (Parliament). Lower House (House of Representatives) votes first, then Upper House (House of Councillors). If Houses disagree, Lower House prevails after 30 days. This prevents deadlock. In U.S., both chambers must agree or government shuts down.
4. JGB Issuance Authorization Specific JGB issuance amounts must be approved as part of budget. MOF cannot issue beyond authorized amount without supplementary budget. No separate debt ceiling vote. Borrowing authority embedded in annual budget. U.S. has separate ceiling requiring repeated votes.
5. Fiscal Year Start
(April 1)		 Budget takes effect. If not passed, provisional budget covers 1-2 months of essential spending. Japan has never failed to pass a budget by fiscal year start. U.S. has shut down 21 times since 1976.

Why Japan Avoids U.S.-Style Crises

Constitutional and Political Safeguards

  1. Lower House Supremacy: Article 60 of Japan's Constitution gives the House of Representatives final authority on budgets. If the Upper House rejects or delays beyond 30 days, the Lower House decision stands. This prevents deadlock.
  2. Parliamentary System: The Prime Minister is leader of the majority party/coalition in the Lower House. By definition, the PM has the votes to pass the budget. In the U.S. presidential system, the executive and legislative branches can be controlled by opposing parties.
  3. No Debt Ceiling Theater: Because borrowing authority is embedded in the annual budget (not a separate vote), there's no recurring hostage-taking opportunity. Once the budget passes, MOF has clear legal authority to issue JGBs as planned.
  4. Cultural Consensus: Japanese political culture emphasizes stability and avoiding government dysfunction. Even opposition parties rarely use budget votes for brinkmanship.

Supplementary Budgets: Japan’s Flexibility Mechanism

While Japan doesn't have shutdowns or debt ceiling fights, it does have a mechanism for mid-year fiscal adjustments:

  • Supplementary budgets (補正予算) can be passed during the fiscal year for unexpected needs (natural disasters, economic stimulus, COVID response)
  • These require Diet approval and can authorize additional JGB issuance
  • Example: Japan passed 3 supplementary budgets in 2020 totaling ¥73 trillion for COVID relief
  • Process is much faster than U.S. emergency spending bills due to parliamentary efficiency

FY2025 Budget: A Rare Exception

While Japan's parliamentary system typically ensures smooth budget passage, FY2025 presented unprecedented challenges:

  • First revision in 29 years: The ¥115.5 trillion budget required revisions approved by both chambers—the first such occurrence under the current constitution
  • Down-to-the-wire passage: Budget passed March 31, 2025, just one day before the fiscal year start (April 1)
  • Political compromise: The Ishiba government was forced to shelve planned reforms to the high-cost medical expense benefit system to secure opposition support
  • Lesson: Even Japan's robust constitutional safeguards can be tested when political coalitions are fragile, though the system still prevented an actual shutdown

Comparative Summary: U.S. vs Japan Fiscal Governance

Feature United States Japan Market Implication
Government Shutdowns 22 since 1976, including 35-day shutdown (2018-19) and ongoing shutdown (Oct 2025 - present, 26+ days) Never occurred (though FY2025 ¥115.5T budget passed just 1 day before deadline—unprecedented challenges) JGBs have lower political risk premium despite recent budget tensions
Debt Ceiling Yes - requires separate vote, repeated crises (2011, 2013, 2023, 2025). Raised by $5T to $41.1T in July 2025 No debt ceiling No recurring default scares for JGBs
Budget Deadlock Risk High - divided government common, requires both chambers + President to agree Very low - Lower House prevails after 30 days, PM controls majority More predictable issuance schedule for JGBs
Borrowing Authorization Must be explicitly raised through debt ceiling votes Embedded in annual budget approval No "X-Date" drama for Japan
Credit Rating Impact S&P downgraded to AA+ in 2011 due to debt ceiling dysfunction Ratings reflect debt level (A+), not governance risk Japan's governance stable despite high debt
Emergency Spending Requires bipartisan negotiation, often slow Supplementary budgets pass quickly through parliamentary majority Faster fiscal response in crises (COVID, disasters)

The Lesson for Bond Markets

Fiscal governance structure matters as much as fiscal metrics. The U.S. has lower debt-to-GDP (123%) than Japan (264%), but actually has higher political risk due to recurring shutdown and debt ceiling crises. Japan's streamlined parliamentary system and absence of a debt ceiling create a more stable environment for sovereign debt issuance—a lesson in how institutional design affects market confidence.

References

Japan Budget Process

  1. Ministry of Finance, Japan. “Highlights of the FY2025 Draft Budget.” Available at: https://www.mof.go.jp/english/policy/budget/budget/fy2025/01.pdf.

  2. Ministry of Finance, Japan. “Japanese Public Finance Fact Sheet April, 2025.” Available at: https://www.mof.go.jp/english/policy/budget/budget/fy2025/02.pdf.

  3. Prime Minister’s Office of Japan. “Press Conference by Prime Minister Ishiba regarding the Cabinet Approving the Fiscal Year 2025 Draft Budget and Other Matters.” December 27, 2024. Available at: https://japan.kantei.go.jp/103/statement/202412/1227kaiken.html.

  4. House of Representatives, Japan. “The House passes the budget for FY2025.” Available at: https://www.shugiin.go.jp/internet/itdb_english.nsf/html/statics/english/r7sou_e.html.

  5. Bloomberg. “Japan Passes Budget Just a Day Before New Fiscal Year Begins.” March 31, 2025. Available at: https://www.bloomberg.com/news/articles/2025-03-31/japan-to-approve-budget-just-a-day-before-new-fiscal-year-begins.

  6. The Diplomat. “Japan Enacts FY 2025 Budget After Rare Revisions.” April 2025. Available at: https://thediplomat.com/2025/04/japan-enacts-fy-2025-budget-after-rare-revisions/.

  7. The Japan Times. “Japan’s fiscal 2025 budget enacted just in time.” March 31, 2025. Available at: https://www.japantimes.co.jp/news/2025/03/31/japan/politics/japan-set-to-pass-budget/.

  8. Nippon.com. “Japan’s Fiscal 2025 Budget Reaches Record High ¥115.5 Trillion.” Available at: https://www.nippon.com/en/japan-data/h02256/.