Japanese Finance Minister Shunichi Suzuki on Monday warned of the “unprecedented” deterioration in the country’s fiscal position, partly due to the “fiscal response to the coronavirus crisis and other similar problems.” Japan’s public debt is more than double its annual economic output, making Japan the developed country under the most pressure. Suzuki’s comments come days after the central bank opted to maintain its ultra-loose monetary policy and at a time when inflation has hit a four-decade high.
Speaking at the first parliamentary session of the year in Japan, Suzuki stressed that public finances are “the cornerstone of confidence in a country” and stressed the need to “ensure sufficient fiscal space to avoid harming the well-being of its citizens.” will undermine times of need”.
Japan’s public debt is the highest among the G-7 countries (group of seven most developed countries) and has been exacerbated over the past year by the Covid-19 pandemic and rising global inflation. In 2021, according to the International Monetary Fund, it was 262.5% of gross domestic product (GDP).
More than 51% of Japanese government bonds are held by the central bank. For years, the government has benefited from 0% yields on these securities, but lately fixed income investors have been pushing for higher stimulus. Contrary to the demands of investors and even the strategies implemented in the US and the European Union to curb runaway inflation, the Bank of Japan decided last Wednesday to leave the short-term interest rate at -0.1% and continue applying a yield curve modulation policy , which causes fluctuations in yields on ten-year bonds within a maximum range of 0.5%. Betting on rising interest rates would increase the state’s financing costs.
The Treasury estimates that every one percentage point increase in interest rates would increase debt service by 3.7 trillion yen ($27,300 million), reaching 32.5 trillion yen ($250,000 million) for fiscal year 2025-2026. “The executive branch will strive to stably manage the government bond issuance through close communication with the market,” Suzuki said. “Total government bond issuance, including bond rollovers, remains at extremely high levels at about 206 trillion yen [un billón de euros]. We will redouble our efforts to keep government bond issuance stable,” he added.
One of the unfinished business of Japanese executives over the past decade has been balancing the public accounts, that is, achieving a balance between their income and their tax expenditures and the cost of financing their debt. In this regard, the head of the Treasury Department reiterated in his speech on Monday that Fumio Kishida’s government maintains the goal of balancing them for the fiscal year ending in March 2026.
Speaking at the opening of the parliamentary session, Japanese Prime Minister Fumio Kishida Suzuki reiterated his determination to restart the economy and stressed the need for a virtuous cycle of growth led by corporate earnings and private consumption. “Wage increases are key to this virtuous cycle,” Kishida said. The Japanese leader recently expressed concern about wage stagnation due to price hikes and urged the country’s companies to review their compensation systems. Following this line, Kishida also pledged to push ahead with labor reform to create a structure that allows for sustained wage growth to overcome the rise in the cost of living. Inflation in Japan accelerated to 4% in December, the highest rate since 1981. Kishida also pledged to increase support for childcare and encourage investment and reform in areas such as green and digital transformation.
For the next fiscal year, which begins in April, the government expects to approve a record budget of 114,380 trillion yen ($900 million) that will include additional items to mitigate rising raw material and energy costs for individuals and businesses. The budget also includes an increase in military spending, which Japan plans to bring to about 2% of GDP at the NATO-nation level over the next five years, amid growing regional security concerns amid rapid arms advances from its neighbors China and North Korea.
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