The Finance Ministry expects a higher interest rate will increase debt-servicing costs for fiscal 2024, reflecting rising long-term government bond yields following a recent policy tweak by the Bank of Japan, sources familiar with the matter said Monday.
The assumed interest rate, used in calculating the costs in a state budget, will likely be set at 1.5 percent for the year starting next April, up from 1.1 percent in recent years, the sources said.
Government ministries and agencies are required to submit their budgetary requests by the end of August and the Finance Ministry is expected to announce the assumed rate for fiscal 2024.
Depending on how long-term yields will move in the coming months, it could still change until it is finalized in December, along with a draft budget plan.
The ministry has set its assumed interest rate at 1.1 percent since fiscal 2017 in calculating the necessary costs for interest payments and debt repayments.
It would be the first hike in 17 years since fiscal 2007, when it was raised to 2.3 percent from 2.0 percent as the BOJ had ended its zero-interest rate policy.
The BOJ has been seeking to keep both short-term and long-term interest rates at rock-bottom levels to support the economy and achieve stable inflation. In July, the central bank loosened its grip by allowing 10-year bond yields to rise above 0.5 percent, timed with an upward revision to its inflation outlook for the current fiscal year.
Japan's fiscal health is the worst among advanced economies, with its debt more than twice the size of the economy. The BOJ's aggressive buying of government bonds, part of its powerful monetary easing over the past decade, has helped limit the country's debt-servicing costs.
The Finance Ministry has estimated that a 1 percent increase in the assumed rate will boost debt-servicing costs by 700 billion yen ($4.8 billion). According to its estimate, at 1.3 percent, the relevant spending would total 26.8 trillion yen for fiscal 2024.
The fiscal 2024 draft budget is also expected to surpass the 114.38 trillion yen in fiscal 2023, already a record, as Japan is set to increase defense spending and social security costs are on the rise due to an aging society.
Accordingly, its debt-servicing costs would exceed 25.25 trillion yen for the current fiscal year.