Budget Deficits and Debt Servicing
Understanding Japan's budget deficit and the growing burden of debt servicing costs
The Budget Deficit Reality
FY2025 General Account Budget: ¥115.5 trillion (record high)
Revenue vs. Spending
Total Revenue: ¥115.5 trillion
- Tax revenue: ¥78.4 trillion (67.9%)
- Bond issuance (new money): ¥28.6 trillion (24.8%)
- Other revenue: ¥8.5 trillion (7.3%)
Key point: Despite record tax revenues, Japan must still borrow ¥28.6 trillion annually to fund current operations. This is nearly 25% of the budget funded by debt—a persistent structural deficit.
Where the Money Goes (FY2025)
| Category | Amount | % of Budget |
|---|---|---|
| Social Security | ¥38.3T | 33% |
| Debt Servicing | ¥28.2T | 24% |
| Local Government Transfers | ¥16.7T | 14% |
| Defense | ¥8.7T | 8% |
| Public Works | ¥6.3T | 5% |
| Education & Science | ¥5.5T | 5% |
| Other | ¥11.8T | 10% |
Critical observations:
- Debt servicing (¥28.2T) is the second-largest budget item after social security, consuming 24% of total spending
- Defense spending rose 9.7% to ¥8.7T, reflecting Japan’s security policy shift
- Social security and debt servicing together account for 57% of all government spending
Debt Servicing Costs: The Hidden Burden
FY2025 Debt Servicing: ¥28.2 trillion (record high, up from ¥27.0T in FY2024)
This massive expense breaks down into:
1. Interest Payments: Estimated ¥11-12 trillion
- Coupon payments on all outstanding JGBs
- Paid to bondholders (domestic banks, insurers, BOJ, foreign investors)
- Average interest rate: Rising from ~0.9% as BOJ normalizes policy
- FY2025 assumption: MOF budget assumes 10-year JGB yield rises to 2.0% (first time in 13 years)
Why are costs rising?
- BOJ policy normalization: ended YCC (March 2024), raised policy rate to 0.5%
- Higher issuance costs: new bonds issued at higher yields
- Refunding at higher rates: maturing low-yield bonds replaced with higher-yield bonds
- Persistent inflation: BOJ targeting 2% inflation sustainably
The risk: If rates normalize to 3%, interest costs could reach ¥35-40T annually, consuming half of all tax revenue
2. Debt Redemption Fund: Estimated ¥16-17 trillion
- Mandatory contribution to gradually reduce debt
- Required by the Special Fiscal Law
- In practice, this money is used to buy back JGBs before maturity or pay down debt
Interest Coverage Ratio
A critical fiscal health metric:
\[\begin{align} \text{Interest Coverage Ratio} &= \frac{\text{Tax Revenue}}{\text{Interest Payments}} \\ &= \frac{¥78.4T}{¥11-12T} \\ &= 6.5-7.1x \end{align}\]Interpretation:
- >10x: Healthy (interest easily covered)
- 5-10x: Manageable (Japan’s current state)
- <5x: Stress (significant fiscal constraint)
- <3x: Crisis (risk of debt spiral)
Historical comparison:
- 1990: 18.5x (¥60.1T revenue / ¥3.25T interest) ← Peak
- 2009: 4.5x (¥38.7T revenue / ¥8.6T interest) ← Crisis level
- 2025: 6.5-7.1x (¥78.4T revenue / ¥11-12T interest) ← Improving but fragile
Key concern: Despite record tax revenues, the ratio is only slightly better than a decade ago because interest costs are rising. The improvement is fragile—dependent on continued economic growth and controlled rate increases.