Japan will build up an extra $19 billion in reserves to subsidize fuel costs and help tackle cost of living pressures, Prime Minister Sanae Takaichi ​said on Monday, while looking to assuage bond market concerns by promising no extra borrowing overall.

The supplementary ‌budget, first ‌reported earlier this month, marks a reversal from Takaichi’s previous remarks ruling out ​the need for extra spending, but comes as a spike in energy prices following the Iran war — along with rising import costs from the weak yen — threaten her persistently high support among the electorate.

The extra ⁠budget of some ¥3 trillion ($19 billion) comes after the government decided to use roughly half of its ¥1 trillion contingency reserves to fund subsidies aimed at curbing utility bills, increasing the need to replenish reserves amid the risk of a prolonged Middle East crisis.

Gasoline subsidies already eating into reserves

Japan has also been extending ⁠separate subsidies to keep gasoline prices steady, a costly step that is quickly using up its contingency reserves as oil prices remain elevated.

Takaichi told reporters ⁠the extra spending will ​be financed by deficit-financing bonds, but added she believes the measure could be ​implemented “without affecting the government bond market.”

The overall amount of bond issuance will remain unchanged from ​the original ‌plan, she said, as stronger tax revenues, nontax income and expected underspending are likely to eliminate the need for around ¥3 trillion in deficit bonds that had been scheduled for issuance through June.

“While closely monitoring daily market developments and economic indicators, the government will steadily reduce the debt-to-GDP ‌ratio to ensure fiscal sustainability and maintain market confidence,” Takaichi told reporters.

Bond yields rise on risks to fiscal outlook

A report that the government is likely to issue fresh debt as part of funding for the extra budget helped drive the yield on the benchmark 10-year Japanese government bond (JGB) to 2.8% last week, its ​highest ​since October 1996.

While analysts say holding planned bond issuance steady signals the Takaichi ​administration is taking into account market concerns about Japan’s fiscal position, risks to the fiscal outlook extend beyond the ⁠supplementary budget.

The government is considering cutting the consumption tax on food, a move that could reduce tax revenue by as much as ¥5 trillion, while rising JGB yields threaten to push debt-servicing costs higher than expected.

In the ¥122.3 trillion general-account budget for fiscal 2026, debt-servicing costs for ​interest payments and debt redemption jumped 10.8% to ¥31.3 trillion, based on an assumed interest rate of 3.0% — the highest in 29 years.

Any sustained rise in long-term interest rates beyond that level would force the government to secure additional funding, adding to pressure on its already heavy debt burden.