Japan To Lift Its Assumed Long-Term Interest Rate For 2024/25
According to the latest media reports, the finance minister of Japan has decided to lift the fiscal year 2024/25's interest rate from 1.1% to 1.5%.
The rate is used in Japan to calculate the payments for debt interest which is then used in the annual state budget. Another thing to note is that the Japanese authorities also tweaked their policy a few months ago. Now, it appears that more changes are also lined up for Japan's fiscal policy.
One thing to note here is that it is an assumed rate, and as such, it can change based on the actual interest rate in the country. So if the assumed interest rate rises, it puts a strain on the budget, which is already expected to exceed the numbers by $782 billion. Most of the extra spending will likely go towards social security spending and defense.
Japan's Debt Is Twice As Its GDP
Not everything is as it seems with the Japanese economy, as its debt burden just continues to rise with every passing day. If we look at the industrial world, Japan is at the top in terms of debt. Similarly, the debt size of Japan is now twice the size of the country's GDP.
With the proposed increase in the assumed rate, the authorities will be able to better calculate the costs associated with debt servicing for the 2024/25 fiscal budget.
As for the interest rates (short-term), it is set near -0.1% as the BOJ is involved in buying government bonds in an attempt to keep the yield (10 years) at 0%. According to the BoJ, this is done to prop the inflation so that it can get close to the 2% target.
Just a month ago, the BoJ also talked about allowing its yield (10-year bond) to reach 1%. Earlier, the BoJ also raised the cap from around 0.25% to 0.5%.
If we look back, the only time the BoJ raised the assumed rate was for fiscal year 2007. At that time, the rate increased from around 2% to 2.3%.