July 24, 2014 / 9:57 AM / 4 years ago

Japan walking 'tightrope' on public debt as yields set to rise: Amari

TOKYO (Reuters) - Japanese long-term interest rates are set to rise as Prime Minister Shinzo Abe’s stimulus policies boost economic growth, Economics Minister Akira Amari said, stressing the need to keep up efforts to rein in the country’s massive public debt.

Japan's Prime Minister Shinzo Abe gives a speech during an announcement event of the Global Launch of Human Development Report 2014 at the United Nations University Headquarters in Tokyo July 24, 2014. REUTERS/Yuya Shino

“Long-term rates are now unexpectedly low and stable, though we shouldn’t take this for granted. As the economy recovers due to our ‘Abenomics’ policies, it’s natural for rates to rise,” Amari told business executives at a seminar on Thursday.

The government must therefore ensure the market does not lose confidence in Japan’s finances by laying out a concrete plan on fiscal reform and striving to revive the economy with its growth strategies, he said.

“Frankly, we’re walking a tightrope,” he said. “We have to tell the public that this is a pretty narrow path.”

Japan’s benchmark 10-year government bond yield has hovered at a 15-month low around 0.5 percent despite an improvements in the economy, due in large part to the Bank of Japan’s massive bond purchases.

Analysts warn that even a slight increase in bond yields would push the cost of financing Japan’s public debt up to dangerous levels. The debt, double the size of Japan’s economy, is the biggest among major industrialised countries.

Abe’s monetary and fiscal stimulus, as well as a series of other measures to boost Japan’s growth potential - dubbed “Abenomics” - have helped lift stock prices and brightened business sentiment, giving the economy a much-needed boost.

Amari said investors were likely to shift funds to equities from government bonds as Japan’s public pension fund, the Government Pension Investment Fund (GPIF), allocates more of its portfolio to stocks.

“When the economy is moving away from deflation and heading toward mild inflation, you need to radically change your portfolio (management). Of course that will push up stock prices,” Amari told a seminar.

He also said Abe was expected to reshuffle his cabinet before convening an extraordinary session of parliament in October.

Reporting by Leika Kihara; Editing by Chris Gallagher and Alan Raybould

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