Japan's newly approved record-high budget for the current fiscal year, amid a sharp increase in defense spending and higher allocation for debt-servicing, has sparked fears of heightened economic and fiscal risks.

Experts said the administration led by Prime Minister Sanae Takaichi could face challenges in managing the economy, which is already buffeted by rising oil prices following the conflict in the Middle East.

At the same time, the potential risks of military expansion cannot be overlooked, they said.

Shinjiro Hagiwara, an emeritus professor of economics at Yokohama National University, warned that the Takaichi administration is facing serious challenges in securing fiscal resources.

In addition to existing issues such as depleting oil reserves, the significant increase in defense spending has forced the government to rely heavily on issuing government bonds, Hagiwara said.

He said that financial markets have already reacted, with falling bond prices and rising long-term interest rates — developments that could weigh on Japan's economy. The growing reliance on issuing new debt to repay old debt is extremely dangerous, he added.

Hiroshi Onishi, an emeritus professor at Keio University in Tokyo and vice-chairman of the World Association for Political Economy, said from a fundamental perspective, loosening restrictions on government bond issuance carries significant risks. This is not only a consensus among economists but also widely recognized within Japanese society, he said.

However, Onishi warned that such constraints are gradually weakening, citing the current Takaichi administration as a typical example.

He said Japan had long maintained defense spending at around 1 percent of GDP, but this has now increased to 2 percent. If it rises further to 3.5 percent, it will significantly erode household consumption and overall economic strength, he said, expressing clear opposition.

Hagiwara said Japan has been issuing government bonds on a large scale, a significant portion of which is held by the Bank of Japan, or BOJ — the central bank — and used to support the defense industry, a policy path that warrants caution.

Historical lesson

He said this is not without precedent. In prewar Japan, too, the BOJ absorbed government bonds to finance the defense industry, ultimately leading to war, defeat, and severe inflation.

Such history must not be repeated, Hagiwara said, adding that allowing the Takaichi administration's hawkish policies to proceed without restraint would pose serious risks.

Public opposition to constitutional revision and military expansion has also been growing across Japan. On the evening of April 8, around 30,000 people gathered outside the parliament building in Tokyo to protest against Takaichi and the ruling Liberal Democratic Party. According to Kyodo News, similar demonstrations were held at more than 160 locations nationwide.

Meanwhile, Japan's heavy reliance on imported energy is adding further strain. As tensions in the Middle East persist, the country faces increasing uncertainty in securing fossil fuel supplies, exacerbating fiscal risks.

Jusen Asuka, an emeritus professor at Tohoku University, said that prices in Japan — including energy costs — have been rising steadily over the past two to three years.

Commodity prices, particularly those linked to raw materials, have already risen across the board, and further increases of several percentage points are possible, he added.

Asuka also warned of potential supply disruptions. He drew parallels with the oil crisis of the 1970s, when panic buying led to shortages of essential goods such as toilet paper. This time, shortages of medical supplies such as gloves could occur due to constraints in naphtha supply.

According to the Japanese Society for Dialysis Therapy, Japan had approximately 340,000 dialysis patients as of the end of 2024. Japanese media reported on April 12 that many medical institutions fear that a shortage of dialysis-related consumables could threaten patients' lives.

Takaichi announced on April 10 that Japan will release a second batch of oil reserves in early May to ease supply pressures. The planned release is expected to cover about 20 days of domestic demand. This follows an earlier release initiated on March 16, totaling roughly 80 million barrels — equivalent to about 45 days of consumption and the largest on record.

To curb rising gasoline prices, the government has been providing subsidies to oil wholesalers since March 19. However, analysts warn that the fiscal burden of such measures could continue to grow.