TRENDS OF JAPAN'S DEBT SERVICE COSTS, FY2003

As a result of the successive issuance of the government bonds, the cost of overall national debt services (i.e., interest payments + bond redemption + administrative costs) reached approximately •16.8 trn in the FY2003 budget, amounting to 20.5% of general account expenditures. According to the Ministry of Finance, •9.1 trn of this cost is for interest payments, and amounts to 11.1% of general account expenditures. The amount of outstanding bonds have increased annually, along with annual bond issuance, but interest payment have been maintained at approximately •9 trn, or 1.8% of GDP, due to the historically low interest rates. If interest rates take a rising trend along with future economic recovery, interest payments will also increase accordingly. 

 

 

However, in addition to interest payments, a number of economists also acknowledge the growing question of Japan's redemption costs. In contrast to most other advanced countries, the redemption system for Japanese Government Bonds, or JGBs, is based on the use of sinking debt funds that distinguish between new bonds and refinancing bonds.

Known as the "60-year redemption rule," Japan's system requires JGBs to be completely redeemed in cash over a 60 year period irrespective of bond duration. These cash redemptions are required to be paid from sources other than refinancing bonds. For example, if •60bn-worth of 10-year JGBs were issued, •10bn would be subject to cash redemption 10 years later, with a •50bn balance redeemable through refinancing bonds; 10 years later, an additional •10bn would be subject to cash redemption, with a •40bn balance redeemable through refinancing bonds and so forth. The process continues until the •60bn of 10-year JGBs are completely redeemed through legitimate tax revenue sources. As government retained revenue is the final payable source of all its expenditures, the Ministry of Finance continues to look for ways to strengthen its debt management policies.  

The chart below plots the history of Japan's total debt service costs (i.e., interest payments + bond redemption + administrative costs) as a percentage of the central government's retained tax revenue (=tax and stamp revenue - local tax transfers).  National debt service costs have risen to almost 70% of retained tax revenue, and are becoming a major burden to the Japanese financial system.

 

 

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