The central government announced a cut in overall spending for the first time in 12 years in its draft fiscal 2024 budget, amid speculation the central bank may soon shift away from more than two decades of ultraeasy monetary policy.

The budget for the coming fiscal year that starts in April is estimated at ¥112.07 trillion ($787 billion), down 2% from the current year's initial amount of ¥114.4 trillion.

Still, the size of the budget hovers above ¥110 trillion for two straight years amid spending pressures on defense outlays to deal with threats from China and North Korea and welfare costs for Japan's fast-aging society.

The country is under pressure to restore its fiscal health in the face of rising interest rates after prolonged stimulus and spending worsened the country's debts — the industrial world's heaviest public debt burden.

In estimating borrowing costs, the government adopted higher interest rates in the budget plan for the coming fiscal year, which would mark the first increase in 17 years.

The plan shows its debt dependence at 31.2%, meaning new bond sales account for one third of the budget.

More than two decades of superlow interest rates have loosened fiscal discipline in a country now saddled with public debt more than double the size of the economy as a result of rounds of fiscal stimulus.

"The bulk of spending cuts comes from reduction of COVID-led emergency reserves. Excluding such factors, spending reform made little headway," said Takahide Kiuchi, an economist with Nomura Research Institute.

"Policymakers must have a sense of crisis and guide responsible fiscal policy as the Bank of Japan normalizes monetary policy. Unexpected rate rises would further aggravate public finances."

The Finance Ministry raised the assumed interest rates to 1.9% from the current 1.1%, up for the first time in 17 years. The assumed rates are used to calculate the cost of interest payments.

The higher assumed rates would push up debt-servicing costs further to ¥27 trillion in fiscal 2024, up 7% from this year.

Analysts say it is unlikely Japan will meet its aim of swinging the primary budget balance, excluding new bond sales and debt-servicing costs, into the black by the fiscal year-end in March 2026.

"What's important is to present a credible plan to restore public finances even if it causes a delay in achieving the target," Takuya Hoshino, senior economist at Dai-ichi Life Research Institute, said.

"I think they are going to review the target sooner or later," Hoshino said.