Rate Shock and Debt Service Cost May Threaten Japan’s ‘NATO’ Buildup

Jan. 16, 2023, 2022 (EIRNS)—Japan’s planned military spending increase this year is by one-quarter—a far sharper increase than the big U.S. hikes of the past two years’ National Defense Authorization Acts—and enacted amid suddenly rising interest rates and high inflation. Japan is raising military spending by 26% in one year, to the equivalent of about $50 billion. However, Japan’s annual spending to service its debt, projected at ¥25 trillion or equivalent to $175 billion, dwarfs its military budget. This debt service is projected at 20% of Japan’s total federal budget of $839 billion announced for the coming year (the comparable U.S. share is projected as 15%). And this, despite the extraordinarily low interest rates on Japan government bonds (JGB) which have been kept at zero and below for 10 years by retiring Bank of Japan Governor Kuroda Haruhiko.

Now that Kuroda has had to relent and let the 10-year JGB rate go to 0.5% (Nikkei reported Jan. 13 that it had broken through that upper bound to 0.53%), Japan’s debt service costs will consume more than 20% of its budget and become a problem for other spending, including military.

The Bank of Japan also forecasts the Japanese population will face 10%-plus inflation in 2023. Using JGB as a means of saving has become almost pointless, and so they are increasingly becoming a purely speculative asset. This has meant increasing foreign ownership of what has traditionally been almost exclusively Japanese-owned debt. Foreign participation is now about 14% and growing, and higher in the longer-term bonds.

The bank has a policy meeting this week and is likely to let the 10-year yield rise further.