Photo/Illutration The Finance Ministry (Asahi Shimbun file photo)

The period of ultra-low interest rates that allowed the government to borrow to pay for vital policies and administrative services without worrying about possible side effects such as the interest payment burden and adverse economic effects has ended.

Among major nations, the status of Japan's public debt is the most serious. 

The importance of observing financial market trends while ensuring the smooth issuance of government bonds and making efforts to improve a fiscal situation burdened by debts has increased markedly.

There is a need for not just the government but also the ruling coalition and opposition parties to squarely face this reality.

The Finance Ministry has revised its plan for the current fiscal year regarding the issuance of government bonds, which is a main pillar of government funding.

The amount of super long-term bonds with maturities exceeding 10 years will be decreased.

This move was made in response to rising interest rates and it is rare for such a change unrelated to budget compilation.

After the Bank of Japan in spring 2024 ended its large-scale loose monetary policy, the pace at which market interest rates have increased has accelerated.

In May, interest rates for super long-term bonds reached a record high.

Even before the Finance Ministry revision, the BOJ, which makes monthly purchases in the government bond market, decided on a new plan.

From the next fiscal year, it will slow the pace at which it reduces the amount of bond purchases.

The BOJ has continued with large volume purchases of government bonds from about 10 years ago as part of its loose monetary policy.

At one time, the amount of bonds it possessed approached 600 trillion yen ($4.2 trillion), about half the outstanding bonds.

But since summer 2024, the BOJ has shifted toward gradually reducing its bond holdings because it weakened the ability of the market to set interest rates.

It will likely take a number of years for the unusual situation to return to normal.

The government is being forced to move away from its dependence on the BOJ.

In recent years, the annual amount of government bonds issued, including refunding, has climbed to about 200 trillion yen. That has led to the difficult problem of finding private-sector buyers.

While bonds will be easier to sell if interest rates are set at high levels, that will limit the level of freedom of the overall budget in later years as interest payments increase.

Although domestic institutional investors, such as banks, would be considered the main purchasers, it will be difficult to have them take on the entire portion previously acquired by the BOJ.

Many experts say that sales of government bonds must be expanded to include individual and foreign investors.

The Finance Ministry is considering making changes to the types of government bonds issued and the sales method.

To restrain the expense of procuring funds and market stirrings, it will be important for the ministry to proceed while determining the mid- to long-term demand.

What will, above all else, be key is to reduce the government's deficits and limit new debts.

The government has repeatedly implemented large-scale economic packages on an annual basis.

But if profligate public spending should continue in a world where interest rates exist, there is a possibility of falling into a vicious circle in which debts lead to even more debts.

One reason for the recent surge in interest rates is the spread of market concerns about an increase in government bond issuances because the various political parties are not dealing squarely with available revenues. 

Instead, the parties have proposed cash payments and consumption tax rate cuts with an eye toward the upcoming Upper House election.

If confidence in the fiscal situation should waver, the foundation for government activity and the overall stability of the economy will be hurt.

While understanding that possibility, politicians should not forget their responsibility to think about the appropriate policies.

--The Asahi Shimbun, July 2

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