Japan Plans ¥36.6 Trillion for Debt Service as Bond Yields Climb

Japan's Finance Ministry will request ¥36.64 trillion, about $230 billion, to service government debt in the fiscal year beginning next April, The Japan Times reported. Kyodo, in a report carried by Nippon.com, describes the figure as a record, an increase of ¥5.36 trillion over the current year's initial budget, and the largest rise in twenty years.

The increase is a matter of arithmetic, not politics. The ministry raised the assumed interest rate on long-term government bonds to 3.8% from 3.0%. On August 18 the benchmark ten-year yield reached 2.945%. Total budget requests for the year will exceed ¥130 trillion, which means interest payments alone would absorb close to 30% of what ministries have asked for.

For nearly a generation, Japan demonstrated that a heavily indebted government can carry a large stock of debt as long as interest rates stay near zero. The reverse of that proposition is now being tested. Investors have pushed yields up partly on inflation and partly on concern about the fiscal direction under Prime Minister Sanae Takaichi, whose programme includes a growth strategy and a planned consumption tax cut.

The squeeze is mechanical. Every additional yen of interest crowds out welfare, defence and public investment inside a budget that is already the product of decades of accumulated deficits.