Japan to Increase FY2024/25 Assumed Interest Rate Following BOJ Policy Adjustment -Kyodo By Reuters

Japan’s Ministry of Finance is set to increase its assumed long-term interest rate to 1.5% for the fiscal year 2024/25, up from a historically low 1.1% this year, according to reports. This adjustment, which will affect the calculations for debt interest payments in the annual state budget, is influenced by rising government bond yields following recent changes to the Bank of Japan’s ultra-easy monetary policy.

While this estimated rate is typically conservative and may fluctuate based on actual long-term rates, any rise puts additional pressure on the nation’s budget, which is projected to surpass a record 114 trillion yen. This increase is linked to planned boosts in defense and social security spending.

Japan has the largest debt burden among industrialized nations, with its debt exceeding twice the size of its GDP. The new assumed rate will be used for calculating debt-servicing costs in the fiscal 2024/25 budget draft, which is scheduled for late December. The rate has remained unchanged at 1.1% since fiscal 2017.

Currently, the Bank of Japan maintains short-term interest rates at -0.1% and purchases substantial amounts of government bonds to keep the 10-year yield around 0%. Recently, the central bank indicated it would allow the 10-year bond yield to rise to 1%, having previously adjusted the cap to 0.5% from 0.25%.

This upcoming interest rate increase will mark the first adjustment since fiscal 2007, when the rate climbed to 2.3% from 2.0% following the abandonment of the prior zero interest rate policy.