Interest rates rise, join hands with fiscal expansion! Japanese government debt interest may double in the next three years.

Due to expectations of interest rate hikes and concerns about fiscal conditions, Japanese government bond yields have recently continued to rise. The yield on the 10-year Japanese government bond surged to 1.97% on December 8th, reaching its highest level since June 2007; the yield on the 2-year Japanese government bond, which is more sensitive to policy changes, also climbed to 1.075% on December 10th, reaching its highest level since July 2007. As of the time of writing, the yield on the 10-year Japanese government bond was 1.928% and the yield on the 2-year Japanese government bond was 1.057%. Japanese government debt interest could double in the next three years The Bank of Japan is set to raise interest rates this month. A series of recent economic data, expectations for steady wage growth, and a reduction in political pressure on the Bank of Japan to maintain low interest rates have supported the prospect of interest rate hikes. It was reported last week that the Bank of Japan is prepared to raise interest rates by 25 basis points at its policy meeting later this month, raising the benchmark interest rate to 0.75% - the highest policy rate level since 1995, provided there are no major shocks to the economy or financial markets during that time. The Bank of Japan will also state that if its economic outlook is realized, it will continue to raise interest rates, while remaining cautious about how high it will ultimately raise rates. It is worth mentioning that Japanese Prime Minister Taro Aso, known for advocating loose monetary policy, has recently issued a warning about the excessive weakness of the Japanese yen. The opposition party in Japan has increased its attacks, claiming that Taro Aso's so-called "responsible proactive fiscal policy" is the reason for the rise in long-term interest rates and the weakening of the yen. Taro Aso recently stated, "We will take appropriate measures as needed against excessive fluctuations or disorderly changes, including speculative trends." Market analysts have already made predictions about this. Former Bank of Japan monetary policy chief Mifuyu Madori predicted at the end of last month that, given one of Taro Aso's key priorities is helping Japanese households cope with high inflation, she will allow the Bank of Japan to proceed with interest rate hikes. A former Bank of Japan executive director revealed that Bank of Japan Governor Kiohide Ueta may implement up to four interest rate hikes before 2027, with three of them happening after the widely expected rate hike next week. This forecast reflects the fact that Japanese monetary policy is entering a more aggressive tightening phase. Driven by expectations that the Bank of Japan will continue to raise interest rates to normalize monetary policy, many market participants believe it is only a matter of time before the yield on the 10-year Japanese government bond crosses the 2% threshold. If the yield reaches this level, it will be the first time since May 2006. Kiohide Ueta said on December 9th at the National Budget Committee that the government bond yields are "rising at a fairly rapid pace." With over 110 trillion yen worth of government bonds issued by the Japanese government, the rising yields on both short-term and long-term government bonds will increase the government's debt interest burden. The recent continuous increase in Japanese government bond yields has raised concerns in the market that the government's debt interest burden will continue to grow like a snowball. If the current trend continues, Japan's debt interest payments will double within three years. The Japanese Ministry of Finance predicts that the yield on the 10-year Japanese government bond will rise to 2.5% by 2028, and that debt interest payments will increase from 7.9 trillion yen last year to 16.1 trillion yen in 2028. Even with the increase in debt interest payments, if the economy continues to grow and tax revenue increases, the sustainability of Japan's finances can still be maintained. However, the key issue is whether the speed of economic growth can cover the increase in interest payments. Yohei Kobayashi, senior chief researcher at Mitsubishi UFJ Research and Consulting, pointed out: "Even if the current economic growth rate is higher, during the period of monetary policy normalization, interest rates may rise and could reverse relative to the growth rate of the economy." Against the backdrop of rising interest rates, the prospects for Japanese companies are mixed. According to data from Teikoku Databank, if corporate borrowing rates rise by 0.25 percentage points, the interest burden of each company will increase by 680,000 yen per year, leading to an average decrease of 2.1% in operating profits. However, on the other hand, companies with a large amount of financial assets will see an increase in interest income. Expansionary policies exacerbate concerns about fiscal conditions At the end of November, the Japanese Cabinet approved an additional budget of 18.3 trillion yen to support Taro Aso's economic stimulus package. According to a statement from the Japanese Ministry of Finance, 11.7 trillion yen of this will be covered by issuing new bonds. Given the waning demand for ultra-long-term Japanese government bonds, it is widely expected that the Japanese authorities will rely on short-term bonds to finance the supplementary budget. Taro Aso's expansionary fiscal policy has raised concerns about Japan's fiscal discipline. Taro Aso needs to alleviate voters' concerns about inflation while avoiding alarming investors. In order to demonstrate the "responsibility" of her fiscal policy, Taro Aso has tried to emphasize fiscal discipline. She previously stated that the total borrowing for this fiscal year will remain below last year's levels. With the addition of the 11.7 trillion yen in new bonds, the total borrowing for this fiscal year will reach 40.3 trillion yen, a decrease of about 4.3% from last year's 42.1 trillion yen. In addition, Taro Aso stated that International Monetary Fund (IMF) Managing Director Kristalina Georgieva expressed confidence at the previous G20 summit that Japan's potential fiscal risks are being handled properly. In addition to new debt, the funding for this economic stimulus plan includes 2.9 trillion yen of unexpected tax revenue, 2.7 trillion yen of unused funds from the previous fiscal year, and 1 trillion yen of non-tax revenue. Data shows that Japan's government debt balance as a proportion of GDP is already at 240%, the highest among major economies globally. Such massive bond issuance will undoubtedly add to Japan's fiscal burden. Financial experts warn that this unrestrained fiscal expansion could lead to a continued increase in government bond yields, further depreciation of the yen, and even financial market turmoil.