November 11, 2009 / 9:27 AM / 9 years ago

UPDATE 1-Japan ministers fret about yields, clash over spending

(For more stories on the Japanese economy, click [ID:nECONJP])

* Rising yields reflect concerns over govt spending

* Japan’s debt burden already worst among major economies

By Stanley White

TOKYO, Nov 11 (Reuters) - Japan’s senior vice minister for the economy Motohisa Furukawa said on Wednesday the government was carefully watching long-term interest rate moves and must be careful to not let rising rates become a trend.

Furukawa also said the government would do its best to maintain the bond market’s trust in the government’s fiscal discipline.

Yields on 10-, 20- and 30-year Japanese government bonds spiked to multimonth highs earlier this week on worries the Democratic Party-led government will not be able to rein in spending and will sell a record amount of debt to fund its policies. [JP/]

“We have to be careful to not let rising yields become a trend,” Furukawa told reporters at a briefing.

“I am watching the situation closely.”

Yields at the long end of the curve have been rising steadily since last month, and the cost of insuring against default in Japanese government bonds has spiked to the highest level since April, after Prime Minister Yukio Hatoyama’s cabinet submitted a record 95 trillion yen ($1.06 trillion) in budget requests for the fiscal year starting in April 2010.

The government is now looking for projects to cut from these initial budget requests, but infighting over who should make these decisions has damaged confidence that Hatoyama’s administration can make the tough decisions needed to rein in spending.

Cabinet ministers are also sending conflicting signals on the need for and the potential size of an extra budget to ensure Japan does not slip back into recession.

Deputy Prime Minister Naoto Kan, who is in charge of crafting Japan’s long-term fiscal and economic policies, said yesterday the government could use 3 trillion yen it froze in a budget made by the previous government to fund an extra budget next year.

When asked about the possibility of compiling an extra budget next year, Finance Minister Hirohisa Fujii suggested the money would come from elsewhere.

“The issue will become clear as we will come up with economic forecasts for the next fiscal year” in December, Fujii told reporters on Wednesday.

“What Kan meant to say was to frontload spending (for the next fiscal year when compiling the extra budget), so it won’t be a factor to increase spending (for this fiscal year). This means that the 2010/11 budget would be cut by as much.”

The International Monetary Fund says Japan’s outstanding debt will spiral to 227 percent of gross domestic product next year, by far the worst in the G7. (Additional reporting by Tetsushi Kajimoto; Editing by Chris Gallagher)

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