Commercial and residential buildings at dusk in the Minato district of Tokyo, Japan.
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Japan’s government will raise its long-term interest rate estimate used to compile the state budget to 1.9% for the next fiscal year from the current year’s 1.1%, two people with knowledge of the matter told Reuters.
It would be the first time in 17 years for the government to raise assumed interest rates and reflects rising government bond yields on expectations the central bank will seek a near-term exit from ultra-loose monetary policy, the people said.
It will also push up the government’s debt financing costs, according to the people, who declined to be identified as they were not authorized to speak with media.
The interest rate estimate is automatically calculated, taking into account the underlying bond yield plus a precautionary 110 basis points in case interest rates spike.
The government has kept the rate at 1.1% for seven years through this fiscal year ending in March under the Bank of Japan’s rock-bottom rates policy. If assumed rates rise, that would add to debt servicing costs and likely squeeze policy-related spending.
The assumed interest rates stood at 1.8% in fiscal 2013 and were lowered in stages to 1.1% in fiscal 2017, about the time when the central bank adopted its yield curve control policy capping the 10-year bond yield around zero.
