Japan’s prime minister, Shigeru Ishiba.
Bloomberg | Bloomberg | Getty Images
Japan will not resort to tax cuts funded by additional debt issuance, Prime Minister Shigeru Ishiba said on Monday, pushing back against political pressure to loosen fiscal policy ahead of an upper house election slated for July.
“Japan is seeing interest rates turn positive and its fiscal state is not good,” Ishiba told parliament, warning of the rising cost of funding the country’s already huge debt as the central bank hikes interest rates.
“While tax revenues are rising, social welfare costs are also increasing,” he said.
With sticky food inflation hurting consumption and U.S. tariffs clouding the economic outlook, Ishiba has faced growing calls from ruling and opposition lawmakers to boost spending and cut Japan’s consumption tax rate from the current 10%.
Finance Minister Katsunobu Kato said while Japan is not facing difficulty raising funds through debt issuance now, it must strive to maintain market trust in its finances.
“A loss of market trust in our finances could lead to sharp rises in interest rates, a weak yen and excessive inflation that would have a severe impact on the economy,” Kato told the same parliament session.
After ending a decade-long stimulus policy last year, the Bank of Japan raised short-term interest rates to 0.5% in January and has pledged to keep hiking borrowing costs if inflation stays on track to durably hit its 2% target.
The BOJ, which still holds roughly half of outstanding Japanese government bonds (JGBs), is also gradually slowing its bond buying, which would push up bond yields and the cost of funding government debt.
Yields on super-long JGBs have risen steadily since April even as those on other maturities remain stable – a sign that the market expects Japan’s finances to worsen.
Japan’s economy shrank an annualized 0.7% in January-March, the first contraction in a year, underscoring the fragile nature of its recovery now under threat from U.S. President Donald Trump’s trade policies.
