Addressing the view that rising long-term interest rates are linked to fiscal collapse, the author argues that Japan’s fiscal position is not in crisis. The article examines the issues surrounding the feasibility of achieving the first year of responsible proactive fiscal policy under Basic Policies 2026 and the impact of long-term interest rates.
The article examines concerns expressed in some quarters that rising long-term interest rates could lead to fiscal collapse, on the premise that Basic Policies 2026 have been approved by the Cabinet and set out a policy to designate FY2027 as the first year of responsible proactive fiscal policy. It examines the issues underlying these concerns.
Regarding the current environment, in which nominal growth is approximately 4% and long-term government bond yields are approximately 2.8%, the author points out that the likelihood of fiscal collapse is low. The author also maintains that the break-even inflation rate will remain at approximately 2% over the next 10 years, ruling out runaway inflation. The article likewise states that CDS rate trends will not be a factor driving fiscal deterioration.
The article explains that rising bond yields cause bond prices to fall, while equities and bonds have an inverse relationship. When equities are dominant, the bond side has less influence, whereas in the opposite environment, equities gain influence. It adds that rising long-term interest rates will not directly pressure public finances, given the substantial assets of the integrated government and the fact that much of those assets consists of financial assets.
The article concludes that Japan’s fiscal position is not in crisis, while introducing the Basic Policies target of nominal GDP growth of more than 3% and real growth of more than 1%. It also suggests that tax revenue gains resulting from a weaker yen should be returned to the public.