<대외硏> "If Japan raises interest rates, fiscal risks will deepen... Financial easing will be maintained for a while"

"Increased National Debt Interest Costs Raise Market Turmoil Concerns"

Analysis suggests that Japan's monetary easing policy, which has continued for over 10 years, will likely be maintained for some time. This is due to concerns about fiscal risks if the policy changes and potential side effects during the asset sales process, such as government bonds.

According to the Korea Institute for International Economic Policy's report on June 13 titled "Evaluation of 10 Years of the Bank of Japan's Monetary Easing Policy and Future Prospects," there are many constraints on changing the Bank of Japan's monetary policy.

Japan's government debt currently exceeds 200% of its Gross Domestic Product (GDP). The report explains, "In the current situation where more than 30% of expenditures are spent on interest and other government bond-related costs, there is concern that interest expenses will increase significantly if interest rates rise." The Japanese Ministry of Finance projects that if long-term interest rates rise by 1 percentage point, government bond costs will increase by about 3.6 trillion yen (approximately 33 trillion won) by 2026.

The report also mentions that if the Bank of Japan sells assets such as government bonds to reduce its balance sheet, the circulation of government bonds in the bond market could surge, potentially increasing uncertainty in financial markets. The Bank of Japan introduced the Yield Curve Control (YCC) policy in September 2016, gradually reducing long-term government bond purchases, but responded to the COVID-19 pandemic by purchasing long-term government bonds, resulting in a record-high government bond balance of 581 trillion yen (approximately 5,338 trillion 867.1 billion won) as of the end of March this year.

External conditions are also a variable. The report states, "The Bank of Japan has repeatedly noted in its outlook reports the need to pay attention to external risks such as the overseas economy," and explains, "Depending on the economic conditions of major countries, it may face situations where it needs to revise its policy path." In fact, after the United Kingdom decided to leave the EU in 2016, the Bank of Japan strengthened its monetary easing policy to mitigate the impact.

Since the Japanese government's declaration of deflation in 2009, Japan has focused on price stability policies. From 2013, it clearly set the target as a "2% year-on-year increase in the consumer price index" and began implementing large-scale monetary easing measures such as negative interest rates and the YCC policy.

However, the report evaluates that despite these efforts, inflation and economic growth have not been effectively achieved. It points out, "The inflation continuing since the second half of last year is mainly due to rising costs and is somewhat different from the demand-pull inflation (inflation accompanied by wage increases) originally intended by the Bank of Japan."

The report views the prolonged policy as having significant negative effects on the real economy as well as fiscal and financial sectors. It analyzes, "Considering domestic and international economic conditions, there was a need to pursue the policy flexibly, but due to fixation on the initial goals, the policy has prolonged for over 10 years, resulting in distortions in the government bond yield curve and burdens on the private sector caused by a sharp depreciation of the yen," adding, "There were limits to improving the private sector's sentiment, which had been depressed during the long-term stagnation period, through central bank policies."