The budget passed. Where does the money go?

On 7 April, Japan’s ¥122.3 trillion budget for fiscal 2026 cleared the upper house – the largest general-account budget in history. It arrived late: the fiscal year had already begun, and Japan resorted to its first stopgap budget in eleven years while the Diet haggled.

In a previous article, I mapped out the Takaichi government’s 17-sector growth strategy. That was February, and the budget bill had just been submitted. Since then, a third meeting of the Growth Strategy Council on 10 March broke the 17 sectors into 61 specific products and technologies, with 27 items fast-tracked for roadmap development.

Japan’s retail investment media have responded with predictable enthusiasm. Zai published a full ticker list by sector. Nikkei Money ran a feature titled “Stocks that profit from Sanaenomics”. The usual names appear: Tokyo Electron for semiconductor equipment, Mitsubishi Heavy Industries for defence, Murata Manufacturing for electronic components. The Japanese adage kokusaku ni uri nashi – “never sell against national policy” – is cited approvingly.

But open the ¥122.3 trillion envelope and cross-reference it with these companies’ financial statements, and a rather different picture emerges.

What ¥122 trillion actually buys

Start with the expenditure breakdown. An analysis by the Dai-ichi Life Research Institute is instructive.

Of the ¥7.1 trillion increase over the previous year, ¥3.1 trillion went to higher debt-service costs and ¥2.0 trillion to the local-allocation tax grant (which rises automatically with central-government tax revenue). Together, these two items account for 70% of the increase. The debt-service expansion reflects the assumed interest rate being raised from 2.0% to 3.0% – a response to the interest-rate environment, not a policy choice. Most of the headline increase, in other words, has nothing to do with “proactive fiscal policy.”

The budget’s composition tells the rest. Social-security expenditure: ¥39.1 trillion, 32% of the total. Debt service: ¥31.3 trillion, 25.6%. Local-allocation grants: ¥19.9 trillion, 16.3%. These three items alone consume 74% of spending.

Where, then, is the growth investment? The ¥1.24 trillion earmarked for AI and semiconductors sits in a special energy account, outwith the ¥122.3 trillion general account entirely. Defence gets ¥9 trillion. METI’s budget is ¥3.07 trillion. Add them up and the growth-related slice amounts to roughly a tenth of total spending.

The budget’s structure, in a sentence: debt service and elderly healthcare consume six-tenths; defence and growth investment share the remainder. The ¥122 trillion headline buys a great deal of continuity and rather less transformation than the press releases suggest.

Reading the “Takaichi stocks” through their own accounts

The Japanese concept of Takaichi meigara – stocks expected to benefit from Prime Minister Takaichi’s policies – has become a fixture of domestic equity commentary. Three companies are invariably cited. Their financial statements, however, suggest the link to government spending is thinner than the label implies.

Mitsubishi Heavy Industries (7011): Full-year revenue guidance stands at ¥4.8 trillion. The growth engine is not defence but the Energy segment, where booming North American demand for gas-turbine combined-cycle (GTCC) power plants drove revenue up to ¥2 trillion and orders to ¥3.2 trillion. The Aerospace, Defence and Space segment contributes roughly ¥500 billion in annual revenue – around 10% of the total. (The segment groups civil aerospace with military work; defence alone is not broken out, but the approximation is consistent with procurement disclosures.) That said, defence accounts for about 20% of the order backlog of ¥12.2 trillion and carries higher margins than Energy. The stock’s re-rating began with the December 2022 defence-buildup plan, well before GTCC orders surged. Defence is not to be dismissed.

Yet the most recent upward revision was driven by gas turbines. CEO Itoh described the US market as “critically important” in his earnings call, and first-half net profit of ¥114.9 billion set a record on the back of GTCC orders. The ¥9 trillion defence budget is real, but the variable that moves MHI’s share price from one quarter to the next is American power demand.

Tokyo Electron (8035): TEL’s earnings supplement shows that roughly 85–90% of its revenue originates outside Japan – TSMC, Samsung, Intel and SK Hynix are the principal customers. Japan’s ¥1.24 trillion AI and semiconductor budget flows as capex subsidies to fabs such as TSMC’s Kumamoto plant and Rapidus, which then order equipment from the likes of TEL. But Kumamoto is one fab. According to SEMI, the industry body, global semiconductor capital expenditure runs at roughly $200 billion a year. Japan’s subsidies represent single-digit percentage points of that figure. TEL’s valuation is a function of the worldwide semiconductor capex cycle. Japanese industrial policy provides a tailwind, but it is not the prevailing variable.

Murata Manufacturing (6981): Full-year revenue guidance is ¥1.8 trillion. Capacitor revenue rose 10.1% year on year, driven by demand for high-capacitance multilayer ceramic capacitors (MLCCs) used in AI servers. CEO Nakajima told analysts that “even if the economy slows in the short term, the data-centre and generative-AI server markets will grow steadily,” and lifted capex 50% to ¥270 billion. Murata is targeting ¥2 trillion in revenue by March 2028. Its earnings are shaped by global smartphone shipments (the company forecasts 1.21 billion units) and hyperscaler server investment. Murata does supply sensors for defence equipment and components for domestic infrastructure, but the policy-related contribution cannot be isolated from its segment disclosures.

All three companies are global businesses denominated in yen. Their earnings are driven by forces largely outwith Tokyo’s control: North American electricity demand, the semiconductor equipment cycle, AI server procurement. The Takaichi meigara label attributes their performance to domestic policy. Their accounts say otherwise.

The real first-order beneficiary

Turn the question around. Of the ¥122.3 trillion, where does the money flow most reliably and in the greatest volume?

Debt service: ¥31.3 trillion. But that figure needs unpacking. It comprises both interest payments and principal redemptions. Redemptions return capital to bondholders; they are not “income.” What accrues as revenue to the financial sector is the interest portion. The Dai-ichi Life Research Institute’s breakdown puts interest payments at roughly ¥10.5 trillion for fiscal 2026 under the 3.0% assumed rate – up some ¥2.5 trillion from the prior year. That figure alone exceeds the ¥9 trillion defence budget.

A caveat is warranted. According to the Bank of Japan’s flow-of-funds data, the central bank holds roughly 53% of outstanding JGBs, so the bulk of interest payments flow to the BOJ before reaching anyone else. Commercial banks’ JGB holdings have fallen sharply since 2012. Yet as the BOJ tapers its bond purchases and its balance sheet begins to shrink, private-sector financial institutions will have to absorb the incremental supply. In an environment of rising rates and rising issuance, growing bank and insurer holdings of government bonds is a matter of arithmetic.

But JGB coupon income is not where the real earnings power lies for banks.

How the rate channel works

The main channel runs through lending. Banks gather deposits cheaply and lend at higher rates. When long-term rates rise, lending rates follow; deposit rates lag. The gap – the net interest margin – widens. Japan’s three megabank groups (MUFG, SMFG, Mizuho) hold combined loan books measured in the hundreds of trillions of yen. A 10-basis-point shift in the net interest margin translates into a profit impact measured in trillions. An earlier article on megabank earnings covers this mechanism in detail.

Life insurers (Nippon Life, Dai-ichi Life, Meiji Yasuda) benefit through a different channel. They hold large portfolios of ultra-long government bonds, matching asset duration to liability duration. Higher rates improve the yield on newly purchased bonds and erode the negative spread on legacy insurance contracts. For more on how to value these businesses, see the life-insurer embedded-value piece.

Proactive fiscal policy pushes rates higher through two routes. The first is direct: more bond issuance means more supply pressure on yields. The second is indirect: fiscal expansion raises nominal growth and inflation expectations, giving the BOJ cover to raise the policy rate. Both routes widen lending spreads for banks and improve reinvestment yields for insurers.

¥9 trillion in defence spending generates roughly ¥500 billion in revenue for MHI. The ¥1.24 trillion AI and semiconductor budget disappears into the global capex cycle. But the profit increment flowing to the financial sector through higher rates dwarfs either figure.

The paradox of proactive fiscal policy

The Takaichi government pledged “growth without tax rises” and directed spending towards AI, semiconductors, defence, shipbuilding and rare earths. The 17-sector growth strategy is meant to transform Japan’s industrial base and deliver what Tokyo calls a “strong economy.”

In fairness, the revenue side of the ledger deserves mention. Projected tax receipts for fiscal 2026 are a record ¥83.7 trillion, reflecting nominal growth and strong corporate earnings. The government’s claim that growth is lifting revenues is not wrong. But expenditure is growing faster. New bond issuance stands at ¥29.6 trillion. Tax revenue is rising; the debt is not falling.

Growth-oriented spending amounts to roughly a tenth of the total. The bulk of the increase in expenditure is structural – debt-service costs and social-security obligations that grow regardless of which party holds power. No advanced economy is exempt from this arithmetic, but in a rising-rate environment interest costs compound quickly.

Borrowing to fund “new Japan” ends up, through the rate channel, boosting the earnings of “old Japan” – the banks and life insurers. The consequence is structural, not intentional. And it will persist for as long as the government keeps issuing bonds, which is to say, for as long as proactive fiscal policy continues.

There is a further twist for foreign investors. The same fiscal expansion that fattens bank earnings also leans on the yen. A wider rate differential with the United States has kept USD/JPY above 159 at the time of writing. For a dollar-based portfolio, Japanese bank stocks may be gaining in yen terms and losing it back on the currency. The rate channel enriches the financial sector in local currency – whether it does so in the investor’s home currency depends on where the yen settles. That question, too, is shaped by the budget.

The budget moves regardless

None of this is to say the 17-sector strategy is without merit. Over ¥1 trillion a year directed at AI and semiconductors, trial extraction of rare earths from the seabed near Minami-Torishima, a defence budget that has more than doubled in four years – these may well reshape Japan’s industrial base over time.

But the budget’s largest receptacle is the financial sector, whose earnings improve structurally as rates rise and borrowing expands.

The very phrase Takaichi meigara blurs the line between politics and investment. Quarterly earnings reports, however, do not list a party affiliation. Whoever occupies the prime minister’s office, MHI’s gas turbines will keep turning and Murata’s MLCCs will keep landing on circuit boards. An investor who confuses the ballot paper with the brokerage account is liable to misjudge both.

The next waypoints are the sector roadmaps due in June and the government’s annual fiscal framework in the summer. What lies beyond them, however, is the growing weight of interest payments – swelling before the seeds of growth investment have had time to bear fruit. “Responsible proactive fiscal policy” has made its promises. The reckoning lies ahead.

This article does not constitute a recommendation to buy or sell any financial instrument. All investment decisions are the reader’s own responsibility.

— Gyokuro