© Reuters. FILE PHOTO: Japanese Prime Minister Fumio Kishida addresses a news conference at the prime minister’s office in Tokyo, Japan, 13 December 2023. FRANCK ROBICHON/Pool via REUTERS/File Photo
By Takaya Yamaguchi
Exciting developments are underway in Japan as the government plans to increase its long-term interest rate estimate for the upcoming fiscal year to 1.9%, up from the current 1.1%. This change reflects the rising government bond yields and expectations that the central bank will seek a near-term exit from ultra-loose monetary policy, according to two sources with knowledge of the matter who spoke to Reuters.
This move, the first of its kind in 17 years, is significant as it will impact the government’s debt financing costs. The assumed interest rate, automatically calculated based on underlying bond yields with an additional 110 basis points, has been unchanged at 1.1% for the past seven years due to the Bank of Japan’s rock-bottom rates policy. If assumed rates rise, it could potentially lead to higher debt servicing costs and put pressure on policy-related spending.
The history of assumed interest rates in Japan shows that they stood at 1.8% in fiscal 2013 and were gradually reduced to 1.1% in fiscal 2017, which coincided with the central bank adopting its yield curve control policy of capping the yield around zero.
