TOKYO – Japan’s finances are becoming increasingly precarious, Finance Minister Shunichi Suzuki warned on Monday, just as markets test whether the central bank can keep interest rates ultra-low, allowing the government to service its debt.
Japan’s public debt is more than double its annual economic output, by far the heaviest burden in the industrialized world.
The government has been helped by near-zero bond yields, but bond investors have recently sought to break the Bank of Japan’s (BOJ) 0.5 percent cap on the 10-year bond yield, as inflation runs at 41-year highs, double the central bank’s 2 percent target.
“Japan’s public finances have increased in severity to an unprecedented degree as we have compiled supplementary budgets to respond to the coronavirus and similar issues,” Suzuki said in a policy speech starting a session of parliament.
Suzuki reiterated the government’s aim to achieve an annual budget surplus – excluding new bond sales and debt-servicing costs – in the fiscal year to March 2026. The government, however, has missed budget-balancing targets for a decade.
The Ministry of Finance estimates that every 1-percentage-point rise in interest rates would boost debt service by 3.7 trillion yen ($29 billion) to 32.5 trillion yen ($251 billion) for the 2025/2026 fiscal year.
“The government will strive to stably manage Japanese government bond (JGBs) issuance through close communication with the market,” he said.
“Overall JGB issuance, including rolling over bonds, remain at an extremely high level worth about 206 trillion yen ($1.6 trillion). We will step up efforts to keep JGB issuance stable.”
“Public finance is the cornerstone of a country’s trust. We must secure fiscal space under normal circumstances to safeguard trust in Japan and people’s livelihood at a time of emergency.”
Meanwhile, government officials who attended the Bank of Japan’s December policy meeting were given a half-hour adjournment to contact their ministries, minutes showed, underscoring the significance of the central bank’s decision to tweak its bond-market peg.
At the Dec. 19-20 meeting, the BOJ kept its ultra-easy monetary policy but shocked markets with a surprise change to its yield curve control (YCC) policy that allowed long-term interest rates to rise.
Before the nine-member board voted on the steps, the government representatives requested that the meeting be adjourned for about 30 minutes, the minutes showed on Monday.
Governor Haruhiko Kuroda approved the request as chair of the BOJ meeting, according to the minutes.
“The government understands the matters discussed today were aimed at conducting monetary easing in a more sustainable manner with a view to achieving the BOJ’s price target,” a Ministry of Finance (MOF) official attending the meeting was quoted as saying, referring to the central bank’s inflation objective.
Another government representative, who belonged to the Cabinet Office, urged the BOJ to be vigilant about the fallout from rising inflation, supply constraints and market volatility on Japan’s economy, the minutes showed.
The two representatives did not voice opposition to the yield control tweak nor any other elements of the BOJ’s discussion, the minutes showed.
Two government representatives – one from the MOF and another from the Cabinet Office – are legally entitled to attend BOJ policy meetings and voice the government’s views on policy decisions, though they cannot cast votes.
In a news conference on Monday, Finance Minister Shunichi Suzuki said he had been briefed by the MOF representative on the BOJ’s expected decision during the adjournment.
It is rare for the government representatives to seek adjournment in the BOJ meetings, which only happens in times of key decisions such as a change in monetary policy.
For example, the government was granted an adjournment during a meeting when the BOJ introduced negative interest rates in January 2016, according to minutes of that meeting.
Under YCC, the BOJ sets the short-term interest rate target at -0.1 percent and that of the 10-year bond yield around 0 percent with a small tolerance band.
At the December meeting, the band set around the 10-year yield target was doubled to 0.5 percentage point up and 0.5 percentage point down, a move aimed at ironing out market distortions caused by the BOJ’s heavy bond buying.— Reuters
