The advisory board for the Finance Ministry has flagged the need to pay more attention to the possible adverse impact of inflation and higher interest rates on the nation¡¯s finances as a shift in Bank of Japan policy looms large.
¡°It will become even more important to manage Japan¡¯s finances responsibly, bearing in mind the risks of a sharp rise in interest rate payments,¡± the board said in its recommendations to the government Monday. ¡°There is a possibility of entering a different phase in which high inflation and rising interest rates are normal.¡±
The BOJ is expected to step back from its ultraloose policy next year as inflation continues to overshoot its 2% target. The central bank has already made adjustments to its so-called yield curve control, sending the rate on benchmark bonds to a decade high.
After around a quarter century of near or subzero interest rates, Prime Minister Fumio Kishida¡¯s government may have to change its interest rate assumptions for the nation going forward. Even small changes could have a large impact given rates are so low and Japan has the largest public debt load among developed economies. The International Monetary Fund estimates gross government debt will be around 255% of gross domestic product this year.
¡°The fiscal situation shouldn¡¯t be a drag for the economy,¡± the advisory board said. ¡°We shouldn¡¯t miss this chance to turn our focus to restoring fiscal health given the state of the economy.¡±
Japan¡¯s 10-year yields hit 0.970% at the beginning of November, the highest level since 2013. That¡¯s more than four times higher than the lowest level in March.
Toward the end of December, Kishida¡¯s government will compile its annual budget for the next fiscal year, which starts in April. Debt servicing usually makes up more than 20% of annual outlays.
Market players are watching to see how the expected change in BOJ policy will be priced into finance ministry projections including the assumed interest rate on debt, a figure that has been kept at 1.1% for the last seven years.
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