The Ministry of Finance is working to set the assumed interest rate used to calculate government bond debt-service costs at around 3.8% in its initial budget request for FY2027. Reflecting rising market yields, the rate is expected to reach a 29-year high.
The Ministry of Finance is working to set the assumed interest rate used to calculate government bond debt-service costs at around 3.8% in its initial budget request for FY2027. The figure was disclosed by multiple government sources. Reflecting the upward trend in market yields, it would be the highest level in 29 years on a budget-request basis, since 3.8% in FY1998.
The FY2026 budget was compiled using an assumed interest rate of 3.0%, making the new figure 0.8 percentage points higher than the initial budget assumption and 1.2 percentage points above the 2.6% assumption at the FY2026 request stage. Although the interest rate level will be reviewed again at year-end, the prospect of swelling debt-service costs putting pressure on fiscal management is likely to become increasingly clear.
The assumed interest rate is calculated using the 1.1% deemed necessary during past crises as a base, with the latest average market yield factored in. The yield on 10-year government bonds, a benchmark for long-term interest rates, has at times reached 2.945%, reflecting expectations of further rate increases following the Bank of Japan's successive rate hikes.
The government has finalized a policy of including tax incentives for Japanese government bonds for individuals in its FY2027 tax reform requests, with proposals to reduce inheritance tax and expand NISA eligibility emerging. The aim is to secure household demand for government bonds against a backdrop of rising long-term interest rates, although some caution has been voiced from the perspective of fairness.