Japan should not backpedal on its efforts to restore fiscal health as the likelihood of higher interest rates would mean increased payments for the debt-ridden nation, potentially limiting its room for future emergency spending, a fiscal policy advisory panel said Tuesday.
In a set of recommendations submitted to the government before it draws up a fiscal policy blueprint this summer, the panel underscored the need to reduce the budget deficit and the size of the national debt in relation to the economy.
Japan has set a goal of recording a surplus in the primary budget balance -- tax revenues minus spending, except for debt-servicing costs -- in fiscal 2025, though the target is widely viewed as unachievable.
The panel, mainly consisting of academics, is urging the government to include debt-related payments when it gauges how much its fiscal health, currently the worst among advanced economies, has improved.
The proposals came after the Bank of Japan raised interest rates in March for the first time in 17 years. Long-term Japanese government bond yields have been trending higher, with the benchmark yield on 10-year bonds nearing 1.0 percent.
"With its enormous outstanding debt balance, Japan should be more keenly aware than other nations about the risk that debt-servicing costs will increase due to higher interest rates and manage its finances with moderation," the advisory panel said.
"The economy is beginning to regain traction, prices and wages are rising and interest rates are about to enter an uptrend. Now is the time to normalize spending as soon as possible and build a sustainable fiscal structure," it said.
While Japan's debt is more than twice the size of its economy, the BOJ owns roughly half of the outstanding government bonds purchased over years of monetary easing.
Japan's accumulating debt is proof that it has been slow in shifting from emergency mode, when massive fiscal stimulus was provided over the years to respond to economic crises and disasters, adding to the woes of the rapidly aging nation, according to the panel.
"It's through restrained fiscal management during peacetime that the country can take fiscal measures without hesitation in times of contingency," the members said.
