(Bloomberg) -- Japan’s Finance Ministry will set a key rate used to calculate the country’s interest payments at 2%, an increase from the current rate, according to people familiar with the matter.
The accumulated interest rate used for calculating Japan’s debt-servicing costs will be set at 2% for the initial budget for the year starting in April 2025, according to the people. In August, when the ministry compiled budget requests from other ministries, the rate was tentatively set at 2.1%, compared with 1.9% for the current fiscal year.
The latest provisions are expected to be approved by the cabinet on Friday as part of the initial budget plan. A ministry official declined to comment on the interest rate reference figure.
The higher rate setting likely reflects a gradual rise in yields on government debt, as the Bank of Japan continues to normalize monetary policy. The central bank raised interest rates for the first time since 2007 in March, followed by another hike in July, with an additional increase expected sometime early next year.
The yield on 10-year government bonds was at 1.055% Wednesday lunchtime in Tokyo. That compares with a low of around 0.564% back in mid-January.
Japan’s yields have remained elevated in recent weeks, amid looming uncertainty surrounding the US economy. Pledges from incoming US President Donald Trump, including higher tariffs on import items and corporate tax cuts, are seen as potentially inflationary for the world’s largest economy. Gains in US bond yields have helped drive up JBG bond yields.
Higher rates mean increased debt-servicing costs, further complicating Japan’s strained national finances. Japan will likely issue a record amount of fresh bonds in the upcoming year to help fund the initial budget, according to local media reports.
The International Monetary Fund estimates Japan’s national debt load in 2024 at over 250% of gross domestic product.
--With assistance from Erica Yokoyama.
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