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Japan warns of dire finances as BOJ struggles to rein in yields

  • Japanese finances have stepped up their severity to an unprecedented point
  • Rounds of off-budget, stimulus measures make finances difficult
  • Public finances are the cornerstone of a country’s trust – finmin
  • Economic revival comes first before fiscal reform in the long term
  • The parliamentary debate begins, all eyes on the new candidate for BOJ governor

TOKYO, Jan 23 (Reuters) – 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.

The government has been helped by near-zero bond yields, but bond investors have recently tried to break through the Bank of Japan’s (BOJ) ceiling of 0.5% on the 10-year bond yield as inflation hits a 41-year high, double the central bank’s the bank’s target of 2%.

“Japan’s public finances have increased to an unprecedented degree as we have put together supplementary budgets to respond to the coronavirus and similar issues,” Suzuki said in a policy speech at the start of the parliamentary session.

It is not unusual for the finance minister to refer to Japan’s strained finances. Despite the country’s growing debt pile, the government remains under pressure to keep the fiscal plug wide open. Japan must balance regional security concerns vis-à-vis China, Russia and North Korea, and manage a debt burden twice the size of its $5 trillion economy – by far the largest burden in the industrialized world.

Markets reacted little to Suzuki’s speech, in which he explained details of the country’s budget for the next fiscal year worth a record 114.4 trillion yen ($878.9 billion).

Suzuki reiterated the government’s goal of achieving an annual budget surplus – excluding new bond sales and debt servicing costs – in the fiscal year to March 2026. The government, however, has missed targets for balancing the budget for a decade.

The Ministry of Finance estimates that every 1 percentage point increase in interest rates would increase debt service by 3.7 trillion yen to 32.5 trillion yen for fiscal year 2025/2026.

“The government will strive to stably manage the issuance of Japanese government bonds (JGBs) through close communication with the market,” he said.

“Total JGB issuance, including bond returns, remains at an extremely high level of around 206 trillion yen.” “We will step up efforts to keep JGB issuance stable.”

“Public finances are the cornerstone of a country’s confidence.” We need to provide fiscal space under normal circumstances to preserve confidence in Japan and people’s livelihoods in times of emergency.”

LABOR REFORM

Prime Minister Fumio Kishida reiterated Suzuki’s decision to revive the economy and approach fiscal reform. He stressed the need for a positive growth cycle driven by corporate profits and private consumption, which makes up more than half of the economy.

“Increasing wages is the key to this good cycle,” Kishida said in his policy speech. He promised to push for labor reform to create a structure that allows for sustainable wage growth and overcoming the pain of rising living costs.

“First and foremost, we need to achieve wage growth that outpaces price increases,” Kishida added, promising to also increase support for childcare and encourage investment and reforms in areas such as green and digital transformation.

(1 dollar = 129.5700 yen)

Reporting by Tetsushi Kajimoto; Editing by William Mallard and Jacqueline Wong

Our Standards: Thomson Reuters Trust Principles.

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