Japan's government expects interest payments on its outstanding debt to roughly double over the next four years, as the Bank of Japan gradually raises interest rates, increasing borrowing costs. According to a document released by the Ministry of Finance on Thursday, under the assumption of 3% annual nominal economic growth, interest expenses for the fiscal year starting April 2029 are projected to reach 21.6 trillion yen (approximately $139 billion), up from the 10.5 trillion yen budgeted for the current fiscal year.
Over the same period, total debt servicing costs are forecast to climb significantly by about 46%, reaching 41.3 trillion yen. This amount is expected to account for roughly 30% of the total projected expenditure of 139.7 trillion yen in FY2029, even surpassing anticipated social security spending. The latest projections highlight growing fiscal pressures as the central bank continues its policy tightening, while the economy faces structural constraints on its growth potential.
This week, Bank of Japan Governor Kazuo Ueda reiterated in an interview his intention to continue raising interest rates, provided economic conditions and price levels continue to improve. On Thursday, a hawkish member of the BOJ's policy board further elaborated on this stance. Although two reflationist-minded members are set to join the policy board in the coming months, market expectations are for the BOJ to hold rates steady in March, with a benchmark rate hike likely in April at the earliest.
For the next fiscal year's budget compilation, the Ministry of Finance set the accumulated interest rate, used as the benchmark for calculating debt servicing costs, at 3%. The ministry anticipates this tentative rate will rise to 3.2% in FY2027, followed by increases to 3.4% and 3.6% in the subsequent two years. Meanwhile, tax revenues are projected to increase annually, potentially exceeding 95 trillion yen in the final year of the forecast period.
Japan's fiscal health was already precarious even before factoring in rising interest rates, with spending pressures mounting in areas such as social security, defense, and numerous other sectors. The initial budget for the new fiscal year starting in April is a record 122 trillion yen. The government, led by Prime Minister Sanae Takaichi, is working to secure parliamentary passage of this budget by the end of March.
Spending pressures are likely to persist, as Takaichi has committed to boosting investment in priority areas and strengthening national security under her philosophy of "responsible, proactive fiscal management." Additionally, she has introduced a series of price relief measures, including a two-year suspension of the food purchase tax, estimated to cost around 5 trillion yen annually.
Takaichi and the Finance Ministry are making efforts to avoid renewed volatility in the bond market. Earlier this year, fiscal concerns drove government bond yields higher. In January, the yield on the 10-year Japanese Government Bond rose to 2.38%, a 27-year high, while the 40-year bond yield surpassed 4%, setting a new record.
"We will not implement reckless fiscal policy that shakes market confidence," Takaichi stated clearly in a parliamentary speech last week. "We will keep the growth rate of outstanding debt below the economic growth rate and steadily reduce the debt-to-GDP ratio."
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