After years of internal debate, Japan is now stepping up its defense capabilities.
But funding for the new outlays is less certain — and that has put focus on the redemption period of Japanese government bonds (JGBs).
In December, Prime Minister Fumio Kishida announced a drastic revision of the country’s defense strategy, pledging to increase related spending by 50% to around ¥43 trillion ($331.6 billion) by the fiscal year beginning April 2027. The move will see Japan build counterstrike capabilities allowing the targeting of enemy bases and substantially bolster the domestic defense industry.
To finance this, the government estimates it needs an extra ¥4 trillion annually from fiscal 2027.
A robust spending review, together with the use of surpluses in the government’s special accounts, is expected to provide approximately ¥3 trillion.
How to secure the remaining ¥1 trillion has now become a matter of debate within the ruling Liberal Democratic Party.
Although Kishida did not touch explicitly on the possibility of a tax hike during his policy speech Monday, he didn't rule it out, affirming that the burden will be shouldered by the current generation as part of “our responsibility to future generations.”
However, the idea has been met with a backlash from within the LDP, with prominent members openly expressing their discontent.
A special committee on defense spending, led by LDP policy chief Koichi Hagiuda, held its first meeting Jan. 19 to discuss the matter and find potential sources of funding outside of taxes.
“We’d like to have responsible discussions on the funding to prevent the enhancement of the country’s defense power from becoming pie in the sky,” Hagiuda said before the meeting.
At the top of the agenda was the overhaul of the redemption period of JGBs from 60 to 80 years.
Sovereign debt is funding that governments have procured on the market to pay for present or future expenses. According to the lender, which could be a domestic or international entity, governments will be charged an interest rate that, together with the debt itself, is to be redeemed by a certain period.
Japan has the highest debt-to-gross domestic product ratio among developed countries — the total stood at over ¥1 quadrillion at the end of 2022, equivalent to 252.3% of GDP.
Current rules, established when Japan started issuing debt during the 1960s infrastructure boom, require the government to pay lenders back 60 years from the issuance date.
This means that every year Japan pays back one-sixtieth of the debt as part of its budgetary expenses. In fiscal year 2023, this will amount to approximately ¥16 trillion.
A potential extension of the period from 60 to 80 years would mean that, instead of one-sixtieth of the debt, Japan would need to annually redeem only one-eightieth of it.
Those advocating for the overhaul say that this will free up some surplus capacity — 0.35% of total debt, approximately ¥4 trillion annually — to allocate to defense spending.
They argue that, as the annual amount of redeemed debt decreases, actual government spending on debt per year will similarly be reduced.
However, the actual amount of debt does not decrease.
Extending the redemption period by 20 years means that the payment will only be deferred by 20 years, evening up the balance sheet and leaving things unchanged.
Champions of the proposal stress that the 60-year redemption rule — originally introduced to restrict the use of governmental bonds — is unique to Japan.
Many countries, for example the U.K., issue perpetual bonds, which have no redemption date, and pay back only the interest, omitting the principal.
On the other hand, critics of the proposal say that, while the 20-year extension does not alter the balance sheet per se, earmarking that surplus capacity for policy expenditure would entail an overreliance on debt and potentially heighten the burden on future generations.
The LDP is deeply divided on the issue: On one side are those promoting fiscal orthodoxy, who are hesitant to endorse further dependence on debt, while on the other there are those who fear that a tax hike would affect the party’s fortunes in local elections in April.
Opinions within the committee were split half and half, according to Takayuki Kobayashi, its secretary-general.
While members of the committee called for an understanding of the severity of the situation, the prime minister's aides remain skeptical and would rather opt for a tax hike — on income, corporate revenues and tobacco — to pay for the defense increase.
Answering opposition parties' questions in parliament, Kishida said that while he intends to make use of 60-year bonds for Self Defense Forces-related infrastructure improvements, a potential overhaul of the redemption period would roil markets, deeply impacting confidence in Japan’s debt sustainability.
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