The projections are the first to be compiled under Prime Minister Sanae Takaichi’s administration, which has announced big spending plans aimed at cushioning the blow to households from rising living costs while promoting investment in growth areas.

Under the latest projections approved by the cabinet on Wednesday, the government expects Japan’s economy to expand 1.1% in the current fiscal year, up from 0.7% growth estimated in August due to the smaller-than-expected hit from US tariffs.

Growth is expected to accelerate to 1.3% in fiscal 2026 as robust consumption and capital expenditure offset soft overseas demand, according to the projections.

The government said it expects consumption to rise 1.3% next fiscal year, the same pace projected for fiscal 2025, as tax breaks and moderating inflation underpin household spending.

Capital expenditure will likely increase 2.8% in fiscal 2026, faster than an estimated 1.9% rise for the current fiscal year, due in part to the effect of subsidies and tax breaks aimed at promoting investment in crisis management and growth areas.

The government will use the estimates when it drafts the next fiscal year’s state budget, which will be finalised on Friday.

The administration compiled a ¥21.3 trillion (US$136.7 billion) stimulus package in November that included payouts to families with children, subsidies to cut utility bills, and fiscal spending to promote investment in areas such as infrastructure, artificial intelligence and semiconductor chips.

The next fiscal year’s budget is likely to include record total spending in line with the administration’s expansionary fiscal approach, which has heightened market concerns over debt oversupply and pushed up government bond yields.