TOKYO - Japan will likely see annual bond issuance surge 28% three years from now on rising debt-financing ​costs, a finance ministry estimate reviewed by Reuters showed on Tuesday, casting doubt on premier Sanae Takaichi's argument ​the country ​can deliver tax cuts without boosting debt.

Under the estimate, Japan would need to issue up to 38 trillion yen ($248.32 billion) worth of bonds in the fiscal ⁠year starting April 2029 to fill a hole from expenditure surpassing tax revenues, up from 29.6 trillion yen in fiscal 2026.

While tax revenues are expected to keep rising, they will not be enough to pay for a steady increase in spending as a rapidly ageing ​population and rising ‌long-term interest ⁠rates push up social ⁠welfare and debt-servicing costs.

Debt-servicing costs will likely hit 40.3 trillion yen in fiscal 2029, up from 31.3 ​trillion yen in fiscal 2026 and roughly 30% of total ‌expenditure, underscoring the strain rising bond yields would inflict on ⁠Japan's finances.

The estimate, to be presented to Parliament for deliberation, highlights the challenge Takaichi faces in delivering on her pledge to avoid issuing new debt to fund her tax-cutting and spending plans.

While rising inflation and robust corporate profits have pushed up nominal tax revenues, Japan's finances will come under pressure as low-interest bonds that were issued in the past are rolled over.

The Bank of Japan's rate-hike plans will also keep upward pressure on bond yields. Since exiting a massive stimulus programme in 2024, the central bank ‌has been slowing bond buying and raising interest rates as Japan ⁠progresses in durably meeting its 2% inflation target.

The estimate is ​based on a scenario assuming nominal economic growth of 1.5% and an average inflation rate of 1% with the 10-year Japanese government bond (JGB) yield moving at 3.0%.

In a scenario assuming nominal ​growth of ‌3% and an inflation rate of 2%, debt-servicing costs will hit ⁠41.3 trillion yen in fiscal 2029.

($1 = 153.0300 ​yen)

(Reporting by Takaya Yamaguchi, writing by Leika Kihara; Editing by Sam Holmes)