Japan on Friday approved a 112.07 trillion yen ($787 billion) draft budget for fiscal 2024, marking the first drop in 12 years as COVID-related emergency funding was trimmed, but outlays for defense, social security and debt-servicing all swelled to a record high.

The budget, although smaller than the record 114.38 trillion yen allocated for the current business year to March, is still the second-largest, underscoring the urgency for debt-ridden Japan to rein in spending and restore its fiscal health.

Prime Minister Fumio Kishida (2nd from L) addresses a meeting of the government and ruling coalition parties at the premier's office in Tokyo on Dec. 22, 2023. (Kyodo) 

Debt-servicing costs ballooned to 27.01 trillion yen, a level unseen before, as the government expects higher interest rates, in line with the Bank of Japan's loosening its grip on government bond yields.

Prime Minister Fumio Kishida believes that priority should be given to boosting the economy over fiscal rehabilitation. The latest budget plan reflects the government's focus on helping consumers cope with the rising cost of living and encouraging companies to raise wages.

"It is a budget that will seek to maximize support for wage growth that outpaces inflation," Kishida told reporters after his Cabinet formalized the spending plan.

"We will make sure it will be approved by parliament at an early date during its regular session from early next year," he said.

After fiscal spending surged during the COVID-19 pandemic, the government sought to bring it down to "peacetime" levels from crisis mode. For the next fiscal year, the government reduced reserve funds that can be used in times of emergency by bypassing parliamentary approval.

Defense spending totaled a record 7.95 trillion yen for fiscal 2024, the second year of a government plan to achieve a substantial increase in defense-related outlays to 43 trillion yen until fiscal 2027.

The expanded budget is designed to counter security threats from countries such as China, North Korea and Russia and boost security cooperation with the United States.

Japan compiled a smaller general-account budget for the next fiscal year, partly because it had to pool some 3.3 trillion yen a year earlier for future use.

About a third of the state budget, 37.72 trillion yen, is earmarked for social security costs, with Japan being one of the world's fastest-aging nations.

Natsuo Yamaguchi (2nd from R), who heads Komeito, the coalition partner of the ruling Liberal Democratic Party, attends policy talks between the government and the ruling coalition in Tokyo on Dec. 22, 2023. (Kyodo) ==Kyodo

Part of the funding will be used to support households with children by increasing child allowances and curbing costs to receive higher education as the government views it imperative to reverse the dwindling birthrate.

The number of newborns slipped below 800,000 for the first time in 2022 and the population is expected to shrink further in the years to come. The government plans to boost annual child-care-related spending by 3.6 trillion yen by fiscal 2028, part of which will be secured by debt issuance.

After rising prices of everyday goods boosted consumption tax revenue to a record high, the government is projected to secure 69.61 trillion yen from overall tax revenue, the largest-ever amount.

The remaining shortfall in the budget will be filled by issuing 34.95 trillion yen worth of government bonds and other means.

For fiscal 2024, the government raised its assumed interest rate to 1.9 percent from 1.1 percent, the first hike in 17 years, after the BOJ decided to allow 10-year yields to rise above 1.0 percent in October under its program to keep borrowing costs extremely low.

Funds will go to boosting the growth potential of the world's third-largest economy through more investments in semiconductors, artificial intelligence and green transformation.

Japan's economy is expected to grow 1.3 percent in inflation-adjusted terms and inflation to slow to 2.5 percent in the next fiscal year from 3.0 percent, according to the Cabinet Office.

In fiscal 2024, a 40,000 yen tax cut per person will be implemented, while more tax incentives will be extended to firms raising wages.

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