Japan: cash is scarce — yet the show must go on

A record defense budget request for the coming fiscal year has once again been crafted by Japan’s Ministry of Defense. The proposal envisages 8.9 trillion yen — or $56.3 billion in today’s dollar terms — being allocated to military outlays within the 2027 national budget, as the Kyodo news agency reports, quoting sources. At the very least, that is the starting point.

As the agency further notes, the actual budget will swell even more substantially, since the request includes numerous clauses with no price tags attached — amounts that will be only finalized during the appropriations process later this year.

What is more, the final budget for fiscal year 2027 will also reflect the ongoing revision of Japan's three core national security documents. According to a senior government official, defense outlays could ultimately account for some 10 trillion yen.

There is precedent for this.

The Defense Ministry had requested roughly 8.8 trillion yen for fiscal 2026, and the budget ultimately adopted in April came to approximately 9 trillion yen — including expenditures linked to realignment of US forces stationed in Japan. That let the Tokyo government declare that the two percent of GDP defense spending threshold had been reached two years ahead of the original schedule.

Nevertheless, the question of whether Japan is truly prepared to raise defense spending to 3.5 percent of GDP — as Washington has been insisting — remains formally open.

"We expect our allies to devote a far greater share of their gross domestic product to their own defense, so as to begin redressing the enormous imbalance accumulated over decades of vastly higher outlays by the United States," states the US National Security Strategy, adopted in 2025.

The strategy also invokes the Hague Commitment, which sets a five percent of GDP defense spending benchmark for NATO countries. The document reminds its readers that the commitment was approved by the Alliance's members — and that they are expected to deliver on it.

At the Shangri-La Dialogue security conference in Singapore this past May, US Defense Secretary Pete Hegseth urged Asian allies to raise their own defense spending to at least 3.5 percent of GDP, arguing that the United States should no longer disproportionately subsidize security of wealthy allied nations. The implicit message was clear: two percent is no longer sufficient; 3.5 percent is the new minimum for defense proper, while five percent represents the overall security standard.

Throughout a series of contacts between US and Japanese leaders, as well as between the two countries' defense ministers, no explicit demand has been publicly issued to Tokyo to increase defense outlays. However, October 2025 saw Hegseth express hope for a swift growth of Japan's defense spending — a remark he made following a meeting with Japan's Defense Minister Shinjiro Koizumi.

In essence, Japan is now being held to much the same standards as Washington's European allies when it comes to boosting defense expenses. Gently, but insistently.

Debate over raising spending above two percent has already begun within Japan itself. In May 2026, the ruling Liberal Democratic Party started examining potential security spending levels ranging as high as three to five percent of GDP — in the context of revising the three foundational security policy documents.

The problem, however, is where to find the money.

The Defense Ministry explicitly lists four main sources: cutting or reallocating other budget items; using surpluses from previous fiscal years; non-tax revenues via the special Defense Fund; and additional taxation.

Meanwhile, the government — while drawing up expansive plans for rearmament and defense industrial base nationalization — has yet to explain how it will cover the rising defense outlays. And if military spending is raised from the current two percent to 3.5 percent, budget outlays would double from present levels, requiring an additional 10.4 trillion yen per year.

The way out would be some combination of social spending cuts, tax hikes, and increased government debt.

But slashing social welfare amid rapid population ageing is no easy task. Nor can Tokyo simply cancel subsidies on gas and electricity while the Middle Eastern crisis remains far from resolved, with its aftershocks to keep weighing on Japan's economy wholly dependent on hydrocarbon imports.

Issuing bonds to expand the national debt would mean higher debt-servicing costs — that is, fresh interest payment burdens on the budget. And Japan's public debt is already at a record high: nearly 200 percent of GDP. Piling ever more onto this pyramid risks undermining investor confidence in the state's finances, which would immediately impact the stock market, the banking system, and the yen's exchange rate.

Taxation is a difficult issue everywhere. In Japan, however, it is further complicated by the government's two-year moratorium on the eight-percent food tax. How the resulting budget shortfall will be offset has neither been announced yet. And the ruling party's political gain from that move would be entirely nullified with new taxes introduced.

Japan's spirited Prime Minister Sanae Takaichi does not appear used to retreat in the face of difficulties, but she has to explain how she intends to advance, either. On the one hand, she must respond to Washington's pressure and finance the largest military build-up program Japan has undertaken since World War II. On the other, the fiscal maneuvering inevitable in this case could worsen the country's socio-economic situation, further erode the Cabinet's popularity, provoke resignations — and even jeopardize the ambitious state investment plans in cutting-edge economic sectors, which Takaichi envisions as an engine for restoring normal economic activity amid the country’s teetering on the brink of recession for more than a quarter already.

Autumn promises to be anything but easy for her.