Japan's Budget Assumptions Clash with Central Bank Policy

The architects of Abenomics in Japan are now questioning their own policies. A Finance Ministry spreadsheet shows that they assume a long-term interest rate of 3.8%, a 29-year high, and ask for a record ¥36.64 trillion in debt service.

This is higher than the current market levels, which have already priced in rates above 3%. The ten-year government bond yield topped 3% in early September, and the thirty-year sits above 4.18%, the highest since its introduction in 1999.

The gap between these numbers is significant, as one is set by a committee (the Bank of Japan) and the other is set by everyone else (market participants). The central bank is expected to raise its policy rate to 1.25% this week, but the market has already priced in higher rates.

The government's program has three expensive parts: a food tax cut, investment, and interest payments on debt. The first two are budgeted, while the third is growing rapidly due to increasing borrowing costs.