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Japan likely to request over 110 trillion yen budget as rates rise

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Japanese ministries are expected to request a budget of over 110 trillion yen ($753 billion) for the next fiscal year, according to a report by the business daily. This increase in budget demands is attributed to rising interest rates, which will result in higher debt servicing costs. The annual budget requests, which are due to be submitted to the finance ministry by the end of August, highlight the challenge faced by Japan in streamlining spending as the most heavily-indebted government among industrialized nations. The finance ministry will carefully examine these budget requests before finalizing the draft annual state budget in December.

Debt-servicing costs and defense spending are expected to see a 10% increase from this year’s initial budget. Additionally, social security outlay, estimated at 33.7 trillion yen, will rise due to the growing costs of supporting Japan’s aging population. This will be the third consecutive year that budget requests exceed 110 trillion yen and may even surpass the record 111.6 trillion yen requested for fiscal 2022. In the past decade, the government has benefited from low borrowing costs facilitated by the central bank’s loose monetary policy, but recent policy adjustments by the Bank of Japan have indicated that the government cannot indefinitely rely on the central bank to monetize its borrowing.

The finance ministry plans to raise its assumed long-term interest rate to 1.5% for the fiscal year 2024/25, from the current record-low of 1.1%. This adjustment is estimated to result in debt-servicing costs of 28.14 trillion yen, an increase of almost 3 trillion yen compared to the current fiscal year. The Bank of Japan maintains short-term interest rates at -0.1% and purchases large amounts of government bonds to keep the 10-year yield around 0%, aiming to stimulate inflation towards its 2% target. However, the recent rise in the 10-year bond yield, reaching its highest level in nearly a decade, suggests that further increases in interest rates could place additional pressure on debt-servicing costs. Furthermore, the budget request for defense spending is expected to reach a record 7.7 trillion yen, driven by Prime Minister Fumio Kishida’s plan to increase military expenditure to address the challenges posed by a assertive China and an unpredictable North Korea. Some budget items have been requested without specified amounts, potentially further inflating the budget in the future.

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