The international community is watching to see whether the Taiwanese people possess the resolve to defend themselves, Lai said in a New Year's speech broadcast live from the presidential office in Taipei.
Lai urged opposition parties to support his proposal to boost Taiwan's defence spending by $US40 billion ($A60 billion), a proposal currently stuck alongside others in a political deadlock in the opposition-controlled parliament.
"Whether China can achieve its goals on schedule is one thing," Lai said on Thursday when asked about a US report saying China was preparing to have the capability to win a fight for Taiwan by 2027.
"The coming year, 2026, will be a crucial one for Taiwan," he said, adding Taiwan must "make plans for the worst, but hope for the best".
China claims democratically governed Taiwan as its own territory, and it has not ruled out using force to take it under Chinese control. Taiwan rejects China's claims.
Lai's speech came just two days after the Chinese exercises named Justice Mission 2025.
China fired dozens of rockets towards Taiwan and deploy a large number of warships and aircraft near the island in a show of force that drew concern from Western allies including the European Commission and Britain.
Taipei condemned the drills as a threat to regional security and a blatant provocation.
Beijing announced late on Wednesday it had completed the drills, saying its military would continue to strengthen their combat-readiness.
In reply, Taiwan's defence ministry said as there were still a significant number of Chinese planes and vessels in its response area, its armed forces would maintain an "appropriate contingency mechanism". It did not elaborate.
"The Chinese Communist Party's aggressive and militaristic provocations endanger regional security and stability, and have been condemned by democratic allies in the international community," it said in a statement.
China's President Xi Jinping struck a familiar tone on Taiwan in his New Year address shortly after Beijing's announcement, repeating last year's warning to what it regards as forces seeking Taiwan's independence.
"Compatriots on both sides of the Taiwan Strait are bound by blood ties thicker than water, and the historical trend toward national reunification is unstoppable," he said in a speech televised by state broadcaster CCTV.
A Taiwan coast guard official told Reuters that all 11 Chinese coast guard ships had left waters near Taiwan and were continuing to move away.
There were more than 90 Chinese naval and coast guard vessels in the region, with many of them deployed in the South China Sea, near Taiwan and the East China Sea, two security officials in the region told Reuters earlier.
Taiwan's defence ministry on Wednesday said 77 Chinese military aircraft and 25 navy and coast guard vessels had been operating around the island in the past 24 hours.
Among them, 35 military planes had crossed the Taiwan Strait median line that separates the two sides, it added.
As the war games unfolded, United States Ambassador to China David Perdue posted on social media platform X a photo of himself with the ambassadors from countries in the Quad, a grouping that includes the US, Australia, Japan and India.
In the post, he called the Quad a "force for good" working to maintain a free and open Indo-Pacific but gave no details about what the meeting discussed or when it took place.
