Japan’s Fiscal Advisory Board Warns of Impact of Higher Rates

(Bloomberg) -- Japan’s advisory board for the finance ministry flagged the need to pay more attention to the possible adverse impact of inflation and higher interest rates on the nation’s finances as a shift in Bank of Japan policy looms large.

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“It will become even more important to manage Japan’s finances responsibly, bearing in mind the risks of a sharp rise in interest rate payments,” the board said in its recommendations to the government Monday. “There is a possibility of entering a different phase in which high inflation and rising interest rates are normal.”

The BOJ is expected to step back from its ultra-loose policy next year as inflation continues to overshoot its 2% target. The central bank has already made adjustments to its yield curve control, sending the rate on benchmark bonds to a decade high.

After around a quarter century of near or sub-zero interest rates, Prime Minister Fumio Kishida’s government may have to change its interest rate assumptions for the nation going forward. Even small changes could have a large impact given rates are so low and Japan has the largest public debt load among developed economies. The IMF estimates gross government debt will be around 255% of gross domestic product this year.

“The fiscal situation shouldn’t be a drag for the economy,” the advisory board said. “We shouldn’t miss this chance to turn our focus to restoring fiscal health given the state of the economy.”

Japan’s 10-year yields hit 0.970% at the beginning of November, the highest level since 2013. That’s more than four times higher than the lowest level in March.

Kishida’s government will compile toward the end of December its annual budget for the next fiscal year starting in April. Debt servicing usually makes up more than 20% of annual outlays.

Market players are watching to see how the expected change in BOJ policy will be priced into finance ministry projections including the assumed interest rate on debt, a figure that has been kept at 1.1% for the last seven years.

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