Japan’s interest expense is swelling as rates rise, reducing room for fiscal maneuver. The amount allocated to government bond repayments in the draft fiscal 2027 budget is a record high, and the prospect of higher long-term interest rates is adding to fiscal pressure. Meanwhile, South Korea is expected to expand the scale of its fiscal 2027 budget, raising the possibility that its government bond interest expense will increase substantially next year.
Since ending its negative interest rate policy in March 2024, the Bank of Japan has raised its policy rate to 1.25%. Japan’s budget request for fiscal 2027 totals ¥143.0656 trillion, of which ¥36.6386 trillion is allocated to principal and interest payments on government bonds, the highest on record. Long-term market interest rates are expected to rise from 3.0% this year to 3.8% next year, and the possibility of further rate hikes has also been raised.
Japan’s fiscal policy faces a dilemma between yen depreciation, rising prices and increased fiscal spending, with balancing funding for tax cuts and fiscal soundness remaining a challenge. A reduction in the consumption tax on food starting next year could also reduce tax revenue, while rising debt and interest costs are placing further pressure on fiscal management.
In South Korea, the draft fiscal 2027 budget submitted by the government totals KRW 820.9 trillion, approximately ¥95 trillion, representing a substantial 12.8% increase from this year. The increase in tax revenue driven by the semiconductor boom is a factor, but fiscal policy dependent on semiconductors is susceptible to the business cycle, and government bond interest expense is expected to exceed KRW 40 trillion next year. National debt is expected to increase by KRW 106 trillion from this year to KRW 1,519.8 trillion, while the policy on using the Future Response Fund will also affect fiscal room.