The Japanese Cabinet approved a draft budget on Friday for the next fiscal year, totalling a record-breaking increase of 122.3 trillion yen (approximately 780 billion dollars). This includes a defence budget of $58 billion as it aims to fortify its strike-back capability and coastal defence with cruise missiles and unmanned arsenal amidst rising tensions with China.
The draft budget is up by more than 7 trillion yen from the current fiscal year’s budget, which was also an all-time high at the time. Beginning April, 2026, it will mark the fourth year of Japan’s ongoing five-year programme to double annual arms spending to 2 per cent of gross domestic product.
Japan also plans to revise the ongoing security and defence policy by December 2026 to further strengthen its military.
This comes in the backdrop of China-Japan tensions that reached an all-time high last month after Japanese Prime Minister, Sanae Takaichi, said in November that her country’s military could get involved if China were to take action against Taiwan, the self-governing island that Beijing says must come under its rule.
The current security strategy, adopted in 2022, names China as the country’s biggest strategic challenge and calls for a more offensive role for Japan’s Self-Defence Force under its security alliance with the US.
To defend the coasts, Japan will spend 100 billion yen (USD 640 million) to deploy “massive” unmanned air, sea-surface and underwater drones for surveillance and defence under a system called “SHIELD”, planned for March 2028, defence ministry officials said.
The Defence Ministry, already been alarmed by China’s rapid expansion of operations in the Pacific, will also open a new office dedicated to studying operations, equipment and other necessities for Japan to deal with China's Pacific activity.
This comes after Chinese aircraft carrier drills near southwestern Japan prompted Tokyo to protest when Chinese aircraft locked their radar on Japanese aircraft, which is considered possible preparation for firing missiles.
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For 2026, Japan plans to spend more than 160 billion yen (USD 1 billion) to jointly develop a next-generation fighter jet with Britain and Italy for deployment in 2035. There also are plans for research and development of AI-operated drones designed to fly with the jet.’
The five-year defence buildup programme would bring Japan’s annual spending to around 10 trillion yen (USD 64 billion), making it the world’s third-largest spender after the US and China.
Meanwhile, Japan has increased its social security spending to 39 trillion yen to tackle the ageing and already-aged society’s medical service fees.
The education and science project funds have been increased to 6 trillion yen, partly to make high school tuition free.
Besides, 31.2 trillion yen will be allocated to pay interest on government bonds, as the rise in long-term interest rates is pushing up debt.
Meanwhile, tax revenues are projected to hit a record high of 83.7 trillion yen, as solid corporate earnings are expected to lead to wage hikes and higher income. The government will also issue new bonds worth 29.5 trillion yen to make up for revenue and expenditure shortfalls in the next fiscal year.
The Takaichi government is expected to table the budget in the Diet shortly after the New Year celebrations mark the end to speed-up the process of passing the bill.
Japanese Finance Minister, Katayama Satsuki, has noted that the draft budget will drive economic growth and prosperity of the nation without putting extra strain on state finances.
On Friday, she said the draft budget will enable the seamless implementation of policies to bring about a strong, resilient economy.
Takaichi’s government plans to fund its growing military spending by raising corporate and tobacco taxes and recently adopted a plan for income tax increase beginning 2027.
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