(Nov 28): Japan plans to increase its issuance of short-term debt to help finance Prime Minister Sanae Takaichi’s economic package, a move that comes as markets grow uneasy about fiscal discipline and upward pressure on super-long yields.
The Cabinet approved Friday a JPY18.3 trillion (US$117 billion, or $151.78 billion) extra budget to fund the largest round of fresh spending in a stimulus package since the scaling back of pandemic restrictions. Of that total, JPY11.7 trillion will be covered by fresh debt, according to the Finance Ministry. The figures matched numbers in a draft of the budget seen Thursday by Bloomberg News.
To reflect the change, the government revised its bond issuance plan for the current fiscal year. It added issuance of two-year and five-year notes by JPY300 billion each and Treasury bills by JPY6.3 trillion.
The extra budget will finance Takaichi’s economic package to help households cope with the rising cost of living, a key pledge she made in her campaign to become the ruling party’s new leader. The extra budget will also finance an increase in defence spending, after the prime minister brought forward a goal to raise those outlays to 2% of gross domestic product.
Putting a package together that addresses voter concerns about inflation without spooking investors has been a key objective for Takaichi. The budget will now head to Parliament, where it needs approval before enactment.
Takaichi’s expansionary policy has raised worries over the nation’s fiscal discipline, adding to upward pressure on long-term bond yields. Yields on longer-dated government bonds reached their highest levels in more than two decades earlier this month.
The revised issuance plan reflects the government’s effort to minimise market impact. Markets had broadly expected the finance ministry to rely on shorter term bonds to fund the extra budget, given thinning demand in the super-long sector.
The ministry said that yields on two-year and five-year notes have remained relatively stable, with steady investor demand expected. By contrast, super-long yields have shown high volatility since October, and 10-year bond yields have also edged higher recently, it said.
See also: Tokyo inflation beats forecast, keeping BOJ on rate hike path
Takaichi had earlier indicated that total bond issuance for the fiscal year would remain below last year’s level. After incorporating the JPY11.7 trillion in new bonds, overall issuance will reach JPY40.3 trillion, about 4.3% less than last year’s JPY42.1 trillion. By pointing to lower issuance this year, the prime minister is likely aiming to show that she is keeping her expansive fiscal policy “responsible”.
Takaichi said on Wednesday that International Monetary Fund managing director Kristalina Georgieva told her at the recent G20 summit that she was reassured that potential fiscal risks were being properly managed.
Beyond the additional debt, JPY2.9 trillion in higher-than-expected tax receipts, JPY2.7 trillion in unused funds from the previous fiscal year and JPY1 trillion in non-tax revenue will also be used to finance Takaichi’s package.
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