Minimal funding increases will result in erosion of purchasing power across most ministries due to inflation

Policymakers are turning their focus from expansionary policies to sustainable spending

The scaling back of public spending will force government agencies to be more selective in the initiatives they undertake. While budget cuts are concentrated in pandemic-related contingency funds, other agencies are experiencing an erosion of their purchasing power over time due to inflation. These pressures will be most acute in education and public works, where funding growth has stagnated over the past two years. However, budget pressures will also be pronounced in the healthcare and social security space, as Japan’s aging population is forcing policymakers in these sectors to do more with less. As a result, we’ll see continued pressure on public agencies to find efficiencies, prioritize innovation, and cut costs. Over the medium term, the need for restructuring and a willingness to innovate― such as the shift to home-care and accelerated adoption of telemedicine by the healthcare sector―may drive broader changes across government agencies.

For multinaionals to succeed in this environment, ensuring strong alignment between your product offerings and government priorities as well as an emphasis on cost and labor efficiency are crucial for a successful sales strategy. Constant communication with public-sector partners―to stay ahead of any cost-cutting trends or strategic changes―will be a winning strategy as well.


Japan’s national budget is set to contract for the first time in 12 years, as government funding for FY 2024–2025 falls to JPY 112.6 trillion from JPY 114.4 trillion in FY 2023–2024. The contraction of the budget represents a shift in Japanese fiscal policy, which has relied on greater levels of government spending to support economic growth. However, growing funding pressures in the form of a rapidly aging population, higher defense outlays, and ballooning debt obligations no longer make this strategy feasible.

The highlights of the FY 2024–2025 national budget are as follows: 

  • Funding cuts are concentrated in the national contingency fund, where the allocated budget will fall from JPY 5 trillion to JPY 1 trillion. These funds were used to finance COVID-19 related expenses over the past three years. In 2024, they will be devoted to address the destruction caused by the recent earthquake in Noto, provide inflation relief, and promote wage hikes. 
  • All budget items―apart from defense expenditure and debt servicing―will contract in real terms. While funding for social security and healthcare will grow by 2.4% this year, it will fail to keep up with inflation, which averaged 3.3% in 2023. Spending constraints will be more pronounced in sectors like education and public works where funding growth is flat. 
  • Defense spending will grow by 17.9% YOY as Tokyo enters the second year of its military build-up program from 2023 to 2027. The government is on track to spend JPY 43 trillion on the sector over these five years, making it the third largest military spender in the world. However, a concrete plan to fund these expenditures over the long term still has not materialized. 
  • Tokyo increased its estimate for long-term interest repayment for the first time in 17 years, from 1.1% to 1.9%. The BOJ’s loosening of yield curve controls on 10-year government bonds has raised debt servicing costs to an all-time high of JPY 27 trillion.

Our View

This year’s budget reflects a shift in Japanese fiscal policy. The government’s appetite for greater public spending through the issuance of public debt is deteriorating. Policymakers are shifting their focus to create a more sustainable fiscal policy by increasing taxation revenue and keeping a close eye on spending.

However, structural factors will continue to pose a myriad of challenges for policymakers as they attempt this transition: 

  • Japan’s aging population will push healthcare and social security costs upward over the coming years. 
  • Recent policy priorities of greater defense- and childcare-related spending will add to Tokyo’s long list of spending commitments.
  • Higher yields on government bonds (and the possibility of a hike in short-term interest rates) will result in debt-servicing taking a bigger and bigger share of the national budget.
  • Cost-of-living pressures, plummeting approval rates, and a lack of consensus within the LDP have delayed PM Fumio Kishida’s plans to raise taxes, ensuring that the earliest a potential tax hike will come into force will be in 2026.

These challenges will make it difficult, if not impossible, for Tokyo to achieve fiscal sustainability on the timeline laid out by the Cabinet Office. According to Cabinet estimates, the primary account will be in surplus (i.e. annual revenue will outpace annual spending) by 2026 and this will allow the government to begin paying down its debt. However, these projections rely on ambitious forecasts for national GDP and taxation revenue growth. In the more plausible scenario of slower GDP and tax growth, Japan will take longer to achieve fiscal sustainability and, in the meantime, current trends of cost-cutting, declining purchasing power, and emphasis on finding efficiency will be here to stay.

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