Japan to boost shorter debt to fund stimulus plan; Fitch warns on rating

[TOKYO] Japan will likely increase issuance of short- and medium-term bonds to fund a massive stimulus package, sources told Reuters, as the government’s higher spending plan drew fresh warnings from Fitch Ratings on risks to its sovereign credit rating.

The focus on short-term debt likely reflects government concern over recent rises in super-long yields, as markets worry about debt oversupply from Prime Minister Sanae Takaichi’s big spending package.

The administration last week finalised a stimulus package of US$137 billion that included spending far exceeding the previous year’s levels, for the largest stimulus since the Covid-19 pandemic.

Fitch Ratings said the latest stimulus package could increase risks to Japan’s “A” sovereign debt rating “if it represents a significant loosening of fiscal policy over the medium term and puts upward pressure on the government debt/GDP trajectory, a key rating driver.”

“Japan’s broad domestic investor base continues to support relatively low bond yields and the government’s financing capacity, despite gradual monetary policy tightening. Still, risks from sustained higher rates would intensify over time,” it said in a statement.

To fund the stimulus package, the government will increase scheduled sales of Japanese government bonds (JGB) for the current fiscal year by around 7 trillion yen (S$58.1 billion) from the currently planned 171.8 trillion yen, two government officials familiar with the matter told Reuters.

Under the revised bond sale plan, the government will likely increase monthly sales of two- and five-year JGBs by 100 billion yen each from January next year, they said.

It is also expected to increase sales of treasury discount bills by around 6 trillion yen, but make no change to the issuance amount for 10-year, 20-year, 30-year and 40-year JGBs, the sources said.

“The news pushed down rates mainly at the long end of the yield curve” as investors welcomed the fact there will be no increase in issuance of long- and super-long bonds, said Miki Den, a senior Japan rates strategist at SMBC Nikko Securities.

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The 10-year JGB yield fell 2 basis points to 1.795 per cent on Thursday.

The expected increase in short- and medium-term JGB sales would come at a sensitive time for the bond market, which is already jittery over uncertainty on how soon the Bank of Japan could resume interest rate hikes.

It would be the second time the government has revised its fiscal 2025 bond issuance plan following a revision in June when it cut super-long bond sales in the wake of a spike in yields of those maturities.

The revised issuance plan will be submitted to Cabinet for approval on Friday, along with an extra budget to fund the economic stimulus package.

The extra budget will likely be around 18.3 trillion yen with more than 60 per cent funded by new debt issuance, according to a draft seen by Reuters on Thursday.

Japan has continued to roll out spending packages and kept interest rates low even as other major economies dialed back crisis-mode stimulus after the pandemic, leading to a steady increase in its huge debt pile.

Known as an advocate of expansionary fiscal and monetary policy, Takaichi took office last month vowing to boost spending to cushion the economic blow from rising living costs and investment in growth areas like artificial intelligence.

She has also signalled the government’s readiness to water down Japan’s fiscal target, a move critics warn could heighten market doubts over the country’s resolve to rein in debt. REUTERS