Japan unveils record budget in boost to military spending

By Tetsushi Kajimoto and Takaya Yamaguchi

TOKYO (Reuters) -Japan unveiled on Friday a record 114.4 trillion yen ($863 billion) budget for the next fiscal year from April, pushed up by increased military spending and higher social security costs of catering to a fast-ageing population, piling on more debt.

The budget - endorsed by Prime Minister Fumio Kishida's cabinet on Friday - features record military and welfare spending as it confronts regional security challenges from an ever-assertive China and an unpredictable North Korea.

Kishida's controversial plan to double Japan's defence spending to 2% of gross domestic product by 2027 contributed to a record 6.8 trillion yen increase in spending, adding to the nation's public debt already exceeding 2.5 times the size of its economy.

To fund spending for military facilities, warships and other vessels, the government decided to issue in fiscal 2023 just over 434 billion yen of construction bonds, which are usually used to finance infrastructure spending, but not military equipment.

"I believe those ships can be considered assets worth asking for the people to share costs," Finance Minister Shunichi Suzuki told reporters when asked about the decision, while adding the move should not be seen as abandoning fiscal restraints.

RECORD MILITARY, WELFARE SPENDING

The need for more military spending comes at a time of intensifying economic challenges as the Ukraine war, soaring inflation and rising rates worldwide push the global economy to the brink of recession.

For fiscal 2023, the defence spending will rise to 6.8 trillion yen, up 1.4 trillion yen from this year. The government also set aside 3.4 trillion yen to help finance its five-year defence build-up plan.

All of this means a longer road to reducing Japan's debt, as Tokyo aims to achieve a primary budget surplus, excluding new bond sales and debt servicing costs, by the fiscal year ending March 2026.

On the brighter side, tax revenue is estimated at a record 69.4 trillion yen thanks in part to recovery in corporate profits, allowing the government to reduce new bond sales by 1.3 trillion yen to 35.6 trillion yen.

Still, the budget's debt dependency ratio stood at 31.1%, underscoring the fiscal constraints faced by the government.

The budget assumed next fiscal year's exchange rate at 137 yen to the dollar, the weakest since 2010, in calculating fiscal 2023 spending for defence and diplomacy, the officials said.

($1 = 132.5900 yen)