Japan’s politicians adjust budget due to high rates
2023.02.10 08:06
Japan’s politicians adjust the budget due to high rates
By Kristina Sobol
Budrigannews.com – With rising long-term interest rates already forcing policymakers to modify budget projections, the task of steering a smooth exit from ultra-loose monetary settings will likely be complicated by Japan’s ticking debt time bomb.
Kazuo Ueda, a former member of the central bank’s policy board, has been chosen by the government of Prime Minister Fumio Kishida to replace Bank of Japan (BOJ) Governor Haruhiko Kuroda.
On April 8, Kuroda will step down from his position and leave behind a policy that contributed to the extremely low cost of funding the nation’s enormous debt pile.
If confirmed, Ueda’s nomination would come at a time when the BOJ is under increasing pressure to phase out yield curve control (YCC) due to rising inflation and criticism of the heavy-handed intervention for distorting bond market pricing.
There is a lot at stake.
Japan has the highest debt-to-economy ratio among major economies thanks to a flurry of large spending packages and skyrocketing social welfare costs for a rapidly aging population. This debt ratio is 263 percent of the size of Japan’s economy, which is double that of the United States.
As a result, Japan spent 22% of its annual budget last year on debt redemption and interest payment, more than the 15% spent on public works, education, and defense combined. Japan’s rising debt pile complicates BOJ’s exit path.
According to government projections released in January, the ratio could reach 25% in fiscal 2025 under new estimates that take into account recent increases in long-term interest rates.
Despite this, Kishida’s announcement of plans to increase Japan’s defense spending and payments to families with children adds to the government’s spending wish list.
“Monetary policy must gradually be normalized by the BOJ. “However, that won’t be possible unless wages rise and Japan’s fiscal policy becomes more sustainable,” stated the head of a private think tank, Yuri Okina.
Markets believe that Ueda is a little bit hawkish about monetary policy because of his recent statements that criticized Kuroda’s radical stimulus program.
Ueda stated in a July opinion piece that the BOJ should reconsider its extraordinary stimulus program and consider an exit strategy from ultra-loose monetary policy at some point.
The International Monetary Fund has issued warnings regarding Japan’s precarious debt situation, stating last month that the country’s rising debt-to-GDP ratio “could suddenly increase, and sovereign stress could emerge.”
According to Christian de Guzman, senior vice president at Moody’s (NYSE:), Japan was facing a “very risky time” managing debt. However, the government’s “very comfortable” funding situation will continue as any BOJ rate hike will be gradual. Service for Investors.
“We are interested in observing how the BOJ handles the transition. This is an unusual circumstance.”
Global S&P (NYSE:) If businesses, many of which are accustomed to prolonged ultra-low rates, are unable to absorb rising funding costs, a future rate hike could have an impact on Japan’s sovereign debt rating, according to Ratings.
“In Japan’s context, even a rise in interest rates of one to two percentage points is very significant. According to Kim Eng Tan, senior director of S&P’s sovereign ratings team in Asia-Pacific, who spoke with Reuters, “I’m not sure how well the service sector could absorb this increase.”
Rising bond yields are beginning to have an effect on the government’s finances before the BOJ takes any action toward an exit.
The benchmark 10-year bond yield increased by 40 basis points to a high of 0.48 percent by the end of the year as a result of market bets that a rate increase was imminent. The yield briefly surpassed the BOJ’s 0.5 percent ceiling in June 2015, when it reached its highest level since then.
The government revised its 10-year bond yield forecast for fiscal 2025 to 1.5%, up from 1.3% in projections made a year ago, and projects the yield to rise to 1.6% in 2026 due to the rise in long-term rates.
The new estimates indicate that debt servicing costs will rise by 3.6 trillion yen in fiscal 2026 as a result of a 1% across-the-curve rise in yields. That is a significant increase for a nation with annual defense expenditures of 5.4 trillion yen.
In order to protect government spending plans from an abrupt rise in borrowing costs, forecasts used in the budget are set higher than market levels. Prior to YCC, estimates of the government’s yield ranged from 1.6% to 2.2%.
According to government officials with knowledge of the situation, Kishida’s administration is more open to the idea of a gradual BOJ policy normalization than his predecessors were. This is because inflation, not deflation, is becoming a bigger risk for Japan’s economy.
They assert, however, that it will be sensitive to any BOJ action that disrupts government spending plans and upsets the bond market.
As a result, the BOJ will take Japan’s debt situation into account when deciding whether or not to launch.
One official stated, “While it is preferable for market forces to drive bond moves more,” the removal of the BOJ’s yield cap “could destabilize markets and make investors cautious about buying bonds.”
“We’d like the BOJ to avoid that,” we said.
Kazumasa Oguro, now a professor at Japan’s Hosei University and a former official in the finance ministry, warns that the government will have to pay for delaying fiscal reforms during the time provided by the BOJ’s yield control policy.
He stated, “The BOJ is gradually being forced into normalizing policy.” Market forces will ultimately prevail.”
