Interest on debt doubled in four years: Fiscal pressure emerges under Japan's interest rate hike cycle

Given that the Bank of Japan is gradually moving towards raising interest rates, causing borrowing costs to continue to rise, the Japanese government expects that interest payments on outstanding debt will roughly double in the next four years. According to a document released by the Japanese Ministry of Finance on Thursday, assuming a nominal annual economic growth rate of 3%, interest payments for the fiscal year 2029 (starting in April 2029) are expected to reach 21.6 trillion yen (about $139 billion), which is higher than the budgeted 10.5 trillion yen for this fiscal year. During the same period, overall debt-servicing costs are expected to increase by about 46%, totaling 41.3 trillion yen. This expenditure accounts for about 30% of the total projected expenditure of 139.7 trillion yen for the fiscal year 2029, and even exceeds the expected social security expenditure. The latest forecasts indicate that the pressure on finances is increasing as the Bank of Japan continues to tighten its policy, while the potential for economic growth still faces structural constraints. This week, Bank of Japan Governor Haruhiko Kuroda reiterated in an interview his intention to continue raising interest rates as the economic situation and price levels continue to improve. On Thursday, a hawkish member of the Bank of Japan's board further elaborated on this stance. Although two advocates of reflationary policies are expected to join the policy committee in the coming months, markets generally expect that the Bank of Japan will keep interest rates unchanged in March, with a possible increase in April. In preparing the budget for the next fiscal year, the Ministry of Finance will set the cumulative interest rate (used as the benchmark interest rate for calculating debt-servicing costs) at 3%. The Ministry expects the temporary rate to rise to 3.2% in the fiscal year 2027, and then reach 3.4% and 3.6% in the following two years. Meanwhile, tax revenue is expected to increase annually, with the potential to exceed 95 trillion yen in the final year of the forecast period. Even before taking into account the factor of rising interest rates, Japan's financial situation is already precarious, with mounting pressure on spending in social security, defense, and other areas. The budget for the new fiscal year beginning in April is record high at 122 trillion yen. The government led by Prime Minister Kato Sanae is making every effort to push this budget through the parliament by the end of March. The spending pressure is likely to persist, as Prime Minister Kato Sanae has committed to increasing investments in key areas and strengthening national security under her "responsible and proactive financial" concept. She has also introduced a series of price relief measures, including a two-year suspension of the food purchase tax, which is estimated to cost about 5 trillion yen annually. Prime Minister Kato Sanae and the Ministry of Finance are working hard to avoid another wave of volatility in the bond market. It should be noted that earlier this year, concerns in the financial sector pushed bond yields steadily higher. In January, the yield on the 10-year Japanese government bond rose to 2.38%, hitting a 27-year high, while the yield on the 40-year government bond surpassed 4%, setting a new historical record. "We will not pursue reckless fiscal policies that shake market confidence," Kato Sanae stated clearly in her speech to parliament last week. "We will control the growth rate of outstanding debt below the economic growth rate and steadily reduce the debt-to-GDP ratio."