Japanese government advisor warns: Rising bond yields will impact fiscal policy

According to the Zhitong Finance APP, a Japanese government advisory group has urged authorities to strengthen fiscal consolidation efforts, as the Bank of Japan's ongoing monetary tightening measures increase the risk of rising debt servicing costs for this heavily indebted developed nation. A proposal submitted to Finance Minister Katsunobu Kato by the Fiscal System Council on Tuesday warned that the Bank of Japan's interest rate hikes and reductions in bond purchases are steadily pushing government bond yields higher, necessitating more attention to Japan's fiscal situation. The council stated, "We must manage fiscal matters with a high sense of urgency to prevent the rising debt costs from crowding out necessary policy spending." After raising interest rates for the first time in 18 years on March 18 last year, the Bank of Japan has continued to tighten its policies. Against this backdrop, calls for fiscal prudence have also emerged. Japan's tightening cycle, combined with rising overseas bond yields, has pushed Japanese bond yields to multi-year highs. The council warned that if fiscal discipline continues to weaken, Japan may face a downgrade in its sovereign credit rating. The council stated, "A downgrade of government bond ratings is not out of reach," citing Moody's recent downgrade of the U.S. sovereign debt rating as an example. The council added, "If trust in Japan's public finances declines, it could trigger rating downgrades, significant interest rate hikes, market turmoil, and ultimately have negative impacts on households and businesses." Long-term borrowing costs have been soaring in major economies like Japan and the United States. Last week, demand for 20-year Japanese government bonds at auction hit a more than decade low, triggering panic in global markets. The council estimates that by fiscal year 2034, interest payments on Japan's government debt could increase by 8.7 trillion yen (USD 61.1 billion), highlighting the long-term budget pressures arising from rising borrowing costs. Although external uncertainties mainly stem from U.S. trade policies, Bank of Japan officials have consistently stated that they will continue to raise interest rates as long as the economic outlook is realized. At the policy meeting in mid-June, the Bank of Japan is expected to outline a roadmap for reducing bond purchases after March 2026, at which point the Bank of Japan may continue to reduce bond purchases following preliminary discussions with market participants. The council also noted that the issuance of government bonds may increase, posing further risks to Japan's finances. With the House of Councillors election approaching this summer, opposition parties are ramping up pressure for new stimulus measures, including temporarily lowering the consumption tax. Japanese Prime Minister Shigeru Ishiba rejected these proposals, citing Japan's fragile fiscal situation and stating that its debt situation is "worse than Greece." For long-term fiscal health, the council reiterated the importance of achieving a primary budget surplus before the 2025-2026 fiscal year, which aligns with the Japanese government's existing goals. While the initial target was to achieve a surplus before the end of this fiscal year, recent forecasts suggest that this goal is likely unattainable