By Leika Kihara
TOKYO (Reuters) – The Bank of Japan’s withdrawal from a sweeping decade-long stimulus is putting pressure on the government to rethink how it finances its big spending packages with additional debt, a challenge made more daunting by lawsuits. permanent tax exemption policies.
Prime Minister Shigeru Ishiba’s administration plans to spend 13.9 trillion yen ($92 billion) on a package of measures to cushion the blow of rising costs of living, which will be financed by this year’s supplementary budget. will end on Friday.
Ishiba’s ruling coalition is also seen as swallowing the opposition party’s demands for permanent tax breaks, which analysts say could reduce next year’s tax revenue by up to 4 trillion yen.
Such measures would follow the Bank of Japan’s exit from ultra-low interest rates, raising the cost of financing Japan’s 1.1 trillion yen debt, the largest among advanced nations and nearly double the size of its economy. .
Unlike other advanced nations that had phased out stimulus in pandemic mode, Japan continues to compile large spending packages thanks in part to still low interest rates.
But Japan can no longer rely on the Bank of Japan to keep borrowing costs low, having abandoned its yield cap in March, unveiled a plan to reduce bond purchases and signaled its determination to continue raising short-term rates since the current 0.25%.
Japan is expected to spend 27 trillion yen, or 24% of this year’s total budget, on debt service costs. While the yield is well below the 2.1% the ministry used to draw up this year’s budget, the cost could soar if bond yields rise.
There are no signs that the prospects for higher rates are leading to fiscal tightening. Total (EPA:) Japanese government bond issuance () for the current fiscal year ending in March, estimated at 182 trillion yen, is down 6% from last year, but may rise due to Ishiba’s spending package .
Analysts expect total bond issuance for the next fiscal year to remain virtually unchanged from this year, or increase depending on the size of the tax breaks being negotiated among politicians.
CLOCK TICKING
The dilemma runs deep for the Finance Ministry, which oversees debt issuance plans and must fill a gaping void left by the BOJ’s dwindling presence in the Japanese government bond market.
On the one hand, the ministry must reduce the issuance of super-long JGBs due to declining demand from life insurers. This increases the importance of private banks re-emerging as large buyers of JGB, but attracting them back will not be easy.
As the BOJ’s heavy buying crushed yields, private banks now hold just 14% of the JGB market, down from 41% before the introduction of Kuroda’s stimulus in 2013. Tighter capital regulation has also made banks banks to be cautious about increasing bond purchases.
“Given the strong demand from banks, there were calls to increase the issuance of JGB in the medium and long term. There were also strong calls to boost the issuance of Treasury discount bills,” a Finance Ministry official told reporters afterward. to meet with market participants on Tuesday. indicating a willingness to sell shorter-maturity debt that is easier for banks to buy.
However, issuing too many short-term bonds would require Japan to refinance its debt more frequently and would make its finances vulnerable to bond market swings.
While the ministry seeks to attract more individual and foreign investors, they are unlikely to become large and stable enough holders to ensure a smooth debt issuance, analysts say.
To be sure, Japan probably won’t face any imminent problems selling debt, as the benchmark 10-year JGB yield hovers around 1% and the central bank has committed to slowly raising borrowing costs.
But time is ticking for Japan to put its fiscal house in order. A downgrade of Japan’s sovereign debt credit ratings could increase the cost of raising foreign funds for banks and companies, Kyohei Morita, chief economist at Nomura Securities, said at a seminar on Tuesday.
“When we see changes in the way wages and inflation move in Japan, it is a mistake to assume that there will be no change in the way interest rates behave,” he said.
($1 = 151.1700 yen)