Japan Higher Rates Expand Debt Pile, Balanced Budget Seen Delayed Again

A man walks past Bank of Japan's headquarters in Tokyo on June 17, 2022. Kim Kyung-Hoon/Reuters

TOKYO—Japan raised its estimates for long-term interest rates over the coming few years in government’s twice-yearly fiscal projections issued on Tuesday, following the central bank’s decision last month to allow 10-year bond yields to move more widely.

Higher rates will test the government’s ability to service the industrial world’s heaviest debt burden at more than double the size of Japan’s annual economic output.

While a decade of aggressive monetary stimulus under Bank of Japan Governor Haruhiko Kuroda did little to economic growth, which averaged around 1 percent over that time, it has kept the government’s borrowing costs at rock-bottom.

Now the government sees Japan’s primary budget surplus in fiscal 2026, although that surplus would “come into sight” in the next fiscal year if it strives to streamline government budget spending.

“It’s not easy to realise it at a time when uncertainty heightens,” Prime Minister Fumio Kishida told a meeting of his 11-member top economic advisory panel—Council on Economic and Fiscal Policy—which includes Kuroda.

“We will strive to achieve both economic revival and fiscal reform so as not to lose markets’ and global community’s confidence in our medium- to long-term fiscal sustainability.”

Economic Growth, Fiscal Reform

Under its latest projections, Kishida’s government looks to achieve a primary budget surplus—excluding new bond sales and debt-servicing costs—in the fiscal year to March 2026.

The government, which has missed budget-balancing targets for a decade, would miss it again due to increased defense budget, leaving a shortfall of 1.5 trillion yen ($11.56 billion) in fiscal 2025, up from 500 billion yen seen previously.

The debt-to-GDP ratio will peak at 217 percent in fiscal 2022, before steadily declining over the forecast period through fiscal 2032, based on rosy assumptions that the economy will grow by 2 percent per year.

Assuming the baseline scenario of zero growth, the debt-to-GDP ratio is expected to turn upward in the latter half of the forecast period.

Long-term rates are expected to rise from 0.3 percent seen this fiscal year to 0.4 percent in 2023–2025 before climbing eventually to 3.1 percent in fiscal 2032, the projections showed. The projections show that a 0.5 percentage-point rise in long-term rates would add 3.3 percentage points to the debt-to-GDP ratio.

In comparison, the previous estimates issued in July showed long-term rates steady at 0.1 percent in fiscal 2022–2025.

($1 = 129.8000 yen)