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(Bloomberg) -- The Japanese government expects its annual debt-servicing costs to rise to almost $230 billion over the next four years as the central bank’s campaign to gradually raise interest rates drives up financing costs.
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Under the more optimistic of two projected growth scenarios, debt-servicing costs are seen rising to ¥35.3 trillion ($229 billion) in the year starting April 2028, according to estimates released Thursday by the finance ministry. This marks a 25% increase from projected costs in the coming fiscal year. Servicing Japan’s oversized debt is already expected to chew up close to a quarter of the annual budget for the year starting in April.
The latest projection underscores the growing financial strain Japan will likely face amid anticipated additional rate hikes by the central bank.
The Bank of Japan conducted its third rate hike since March 2024 last week, raising the policy rate to 0.5%, the highest level since 2008. Governor Kazuo Ueda indicated during a post-decision press conference that further increases are likely, stating that the bank is still some distance from the neutral rate.
Total interest payments will reach ¥16.1 trillion in the year from April 2028, up from ¥10.5 trillion in the year starting in April.
The estimate assumes an annual nominal economic growth rate of 3% beginning in April 2026, with inflation remaining at 2% for the following two years.
In drafting the budget for the next fiscal year, the Ministry of Finance set the “accumulated interest rate,” a benchmark for calculating debt-servicing costs, at 2%. Japan’s 10-year bond yields are currently around 1.2%. The ministry expects the provisional rate to reach 2.2% in fiscal 2026, followed by 2.4% and 2.5% in the subsequent years. Tax revenues are expected to increase each year, exceeding ¥80 trillion as soon as fiscal 2026.
Japan’s treasury officials have recently expressed heightened caution regarding Japan’s fiscal condition. Last week Finance Minister Katsunobu Kato warned in his policy speech that Japan’s public finances remain in a difficult situation, with the nation’s debt-to-GDP ratio at the worst level in the world. Kato reiterated the need for fiscal reforms to safeguard Japan’s credibility in global financial markets and ensure the well-being of its citizens by addressing both revenue and expenditures.