Japan's parliament on Tuesday enacted a record 114.38 trillion yen ($870 billion) budget for the new fiscal year from April to beef up defense capabilities in the face of security threats from its neighbors and to support the economy, which has been struggling with inflation.

The defense budget will reach 6.82 trillion yen, the largest on record. Fiscal 2023 marks the start of a five-year period intended to fundamentally revamp the country's defense posture by spending a combined 43 trillion yen to cope with an increasingly assertive China, alongside a nuclear-armed North Korea and a volatile Russia.

The government of Prime Minister Fumio Kishida is aiming to double its annual defense budget to around 2 percent of gross domestic product from the current 1 percent while upholding its postwar pacifist credo.

The approval of the state budget by the House of Councillors comes at a time when the debt-ridden nation has been ramping up spending to ease the burden put on households by rising prices of everyday goods. Core consumer inflation has already hit a four-decade high, mostly due to higher energy and raw material costs amplified by a weaker yen.

The House of Councillors passes the budget for fiscal 2023 in a plenary session at parliament in Tokyo on March 28, 2023. (Kyodo)

The powerful House of Representatives approved the draft budget in February, meaning that under the Constitution it must be enacted before the new fiscal year begins. Both houses of parliament are controlled by a ruling coalition made up of the Liberal Democratic Party and Komeito.

About a third of the 114 trillion yen budget, or 36.89 trillion yen, will be used to cover social security costs, as Japan has one of the world's fastest-aging populations. The government will issue around 35.62 trillion yen worth of government bonds.

Separately, the Cabinet decided to use 2.22 trillion yen in reserve funds for the current business year ending Friday to fund a fresh inflation-relief package ahead of nationwide local elections.

Low-income households will receive cash handouts, while the government will subsidize liquefied petroleum gas bills for households on top of those for electricity and city gas. It will also mitigate the rise in the price of imported wheat and reduce feed costs for livestock borne by farmers.

The Bank of Japan, with academic Kazuo Ueda taking the helm next month, expects inflation will decelerate this year and undershoot its 2 percent target.

Still, average Japanese households will have to spend 60,000 yen more on food items in 2023 than a year earlier, as businesses are expected to raise prices in the coming months, according to an estimate by Mitsubishi UFJ Research and Consulting.

Any boost to the economy from the latest inflation-relief package may be limited. Economists polled by the Japan Center for Economic Research expect the world's third-largest economy to grow 1.03 percent in fiscal 2023 from April.

Faced with sluggish public support, Kishida has vowed to aid the country's nascent recovery from COVID-19, which is now threatened by inflation. His government has decided to spend over 45 trillion yen on economic stimulus since Russia invaded Ukraine in February 2022.

The outcome of the local elections in April will serve as a gauge of voter confidence in his administration.

The COVID-19 pandemic and Russia's invasion of Ukraine have pushed the government to increase fiscal spending at a time when its financial health remains the worst among the advanced economies, with outstanding debt more than twice the size of its GDP.

The use of reserve funds, allocated for emergencies that can skip parliamentary approval, has come under greater scrutiny since the fiscal 2022 budget included a largest-ever figure of 11.76 trillion yen in reserve. The fiscal 2023 budget includes 5.5 trillion yen for emergency use to cope with the pandemic and inflation.

"Part of the unused reserve funds for fiscal 2022 will be treated as surplus money, which in turn will be used for defense spending," said Takuya Hoshino, a senior economist at the Dai-ichi Life Research Institute.

Kishida has said the government will secure the necessary funding by reallocating surplus money from other sources and hiking taxes, among other means. The exact timing of imposing higher corporate, tobacco, and income taxes is yet to be decided.

"If the government continues to allocate huge reserve funds for emergency use and divert part of what is left unused to future defense spending, it makes the flow of funds more complicated than necessary," Hoshino said.

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