Japan’s outstanding government debt topped 1,000 trillion yen (S$10.1 trillion) for the first time, Ministry of Finance data showed on Friday, stoking concerns over runaway debt as the list of spending priorities from the military to childcare expands.

The heavily-indebted government has prioritised near-term economic growth over fiscal reform. Its response to the Covid-19 outbreak included massive stimulus measures that strained public debt, which is more than double the size of the economy.

As a result, the outstanding balance of general bonds, which includes regular short to long-term maturities but excludes other types of debt such as agency bonds, stood at 1,006 trillion yen at end-December, according to the ministry’s quarterly data.

The market is closely monitoring any signs of change in the Bank of Japan’s (BOJ) ultra-loose monetary policy that could lead to big impacts on Japan’s ballooning debts and interest payments.

The benchmark 10-year bond yield almost doubled in December after the BOJ’s surprise announcement that widened the long-term yield cap range.

Further rises in long-term rates would send alarm-bells ringing on public debt because it pushes up debt-servicing costs.

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A decade of BOJ’s ultra-loose policy under Governor Haruhiko Kuroda has helped sustain Japan’s finances at the cost of fiscal discipline, because it kept borrowing costs low.

Despite the snowballing public debt, Japan is aiming to double its defence budget over the next five years to counter threats from China and North Korea. It also plans to boost childcare spending to reverse a downturn in the birth rate.

Japan is struggling to achieve even a narrow budget balance target by the fiscal year 2025 because the primary budget, which excludes new bond sales and debt-servicing costs, remains in the red. REUTERS