Not Just a Bad Thing! Rising long-term interest rates increase interest payments on the “national debt”… but is it a plus for families?

BOJ “accepts rising long-term interest rates”…sees easy transition to fiscal consolidation

Long-term interest rates are rising. Japan is saddled with a massive debt of over 1,000 trillion yen in government bonds, and rising interest rates are expected to increase the burden on the Japanese people through higher interest payments. On the other hand, experts have pointed out that a shift to fiscal rehabilitation can be made immediately if the government is so inclined. What will life be like in the future?

The yield on 10-year JGBs is a measure of long-term interest rates. The Bank of Japan’s ultra-low interest rate policy has kept the yield near zero. However, at the end of October this year, the yield rose to 0.955%, the highest level in about a decade and a half, as selling pressure on JGBs increased in the bond market.

The price and yield of JGBs and other bonds are inversely related: a fall in price causes the yield to rise, while a rise in price causes the yield to fall. The BOJ has been buying large amounts of government-issued bonds in the money market to suppress price declines and interest rate rises. While maintaining this policy, the BOJ has recently shifted its stance to allow long-term interest rates to rise to some extent.

National Debt”….Interest payments increase by 10 trillion yen per year with a 1% rise in interest rates Interest payments increase by ¥10 trillion per year with a 1% rise in interest rates

When government bonds come due for redemption (repayment), the government often refinances them because it does not have enough funds to repay them. Although not all of the 1,000 trillion yen in debt will be refinanced at the same time, it is estimated that a 1% increase in interest rates will result in a 10 trillion yen increase in interest payments per year if all of the debt were refinanced at the same time. The government’s initial budget for the current fiscal year totals approximately 114 trillion yen, with tax revenues of just under 70 trillion yen. The shortfall is covered by government bonds and other debt. If interest payments increase due to higher interest rates, the impact on fiscal management will be significant.

The government has been issuing large amounts of JGBs and spreading money around as a measure against deflation. The BOJ has been purchasing these bonds in the money market and adopting a policy of ultra-low interest rates to prevent the government from incurring heavy interest payment costs. The BOJ’s method is called “yield curve control (YCC),” in which the BOJ purchases JGBs to keep the interest rate on 10-year JGBs at “around zero percent. This is the so-called “zero interest rate policy.

Meanwhile, prices have been rising around the world due to economic expansion and soaring oil prices, and countries have been raising interest rates in order to suppress these rises. Global inflation has also increased pressure on domestic financial markets to raise interest rates.

Using the YCC method, the BOJ successively revised the allowable range for long-term interest rates to rise above zero% to around 0.25%, 0.5%, and so on. At the end of July, the Bank of Japan had set the upper limit at 1%, but at the end of October, it changed the upper limit to “around 1%,” thereby shifting its stance to allow interest rates to rise by more than 1%. Interest rates in Japan are also set to rise.