Cost of Interest Payments on Government Bonds: Risk of Future Surge Cannot Be Underestimated

If interest rates go up as a result of the Bank of Japan ending its negative interest rate policy, the cost of interest payments on government bonds, which are the national debt, will expand, putting pressure on fiscal conditions. The government should take every possible measure to restore fiscal health.

The Finance Ministry has announced its estimate that an additional ¥8.7 trillion will be required for interest payments on government bonds in fiscal 2033 if long-term interest rates rise 1 point higher than previously assumed.

The cost of interest payments in the initial fiscal 2024 budget has already amounted to ¥9.7 trillion. The ministry had previously estimated that interest payments for fiscal 2033 would total about ¥25 trillion. If the amount in the latest estimate is added, interest payments for fiscal 2033 will exceed ¥30 trillion. This is more than four times the size of current defense expenditures.

The original assumption for long-term interest rates was 2.1% per year for fiscal 2025 and 2.4% per year for fiscal 2027. A further 1 point increase from these rates can be said to be a high estimate.

However, there is speculation that Bank of Japan Gov. Kazuo Ueda will take steps to further raise interest rates starting this summer. It is highly likely that upward pressure on long-term interest rates will intensify. There is no doubt that restoring fiscal health is becoming increasingly important.

Significant spending is expected in the future on defense costs in response to the worsening security environment, and on measures to deal with the declining birth rate. An increase in social security expenses due to the graying of society is also inevitable. When higher interest payment costs are added to these circumstances, the government will have less budget funds to spend at its discretion.

Since fiscal 2020, the government has compiled large-scale supplementary budgets year after year to deal with such matters as the COVID-19 pandemic and inflation, resulting in a sharp increase in fiscal spending. The outstanding national debt, including government bonds, reached ¥1.286 quadrillion at the end of 2023, more than 100% higher than the nation’s gross domestic product.

It will be important to return fiscal management to a normal state and thoroughly identify wasteful budget items.

To realize fiscal reconstruction, there are calls for the establishment of an “independent fiscal institution” that would monitor and evaluate the nation’s fiscal management from a standpoint independent of the government. Many Western countries have such organizations, and it is worthy of consideration in Japan as well.

In addition to spending reforms, it is also essential to take measures from the viewpoint of sustainable growth in the Japanese economy and increasing tax revenues. If tax revenues grow, there will be room to deal with increased interest payment costs.

It is important for Japanese companies with earnings overseas to channel their overseas profits to Japan and use them to invest domestically. It is also important to effectively use the internal reserves held by many Japanese companies.

There are many fields of business in Japan that need investment, including decarbonization, digitization and labor-saving measures to address personnel shortages. Japan as a whole should draw up a national strategy to make it easier for companies to invest in these areas.

(From The Yomiuri Shimbun, April 9, 2024)