TOKYO: Japan must restore fiscal discipline to brace for rising interest rates, and to ensure market trust in the yen is maintained, an influential ruling party panel said in a draft proposal on fiscal policy obtained by Reuters on Wednesday.
The proposal, which will be reflected in the government’s mid-term fiscal blueprint due out next month, underscores how a weak yen and an exit from ultra-low interest rates are piling pressure on Japan to rein in its huge public debt.
“As global economic developments experience big changes, a strong yen can no longer be taken for granted,” the panel said in the draft proposal, adding that Japan must be mindful of the risk of too-loose fiscal policy eroding market trust in the yen “While we shouldn’t be too pessimistic about recent currency market developments, we must always bear in mind that trust in the yen is not absolute,” it said on the yen’s declines.
“We have recently seen excessive volatility in the currency market driven by speculative moves,” the draft proposal said. Japan must also take into account the prospect of rising interest rates in guiding fiscal policy, after the central bank’s decision in March to end negative interest rates and bond yield control, the draft proposal said.
“Long-term interest rates are rising to around 1% and will likely be set by markets from now on,” it said.
“We can no longer guide fiscal policy on the assumption that interest rates will stay low.”
The views of the panel, which is comprised of Liberal Democratic Party (LDP) lawmakers who are more mindful of the need for fiscal discipline, reflect those of the powerful Ministry of Finance that oversees the state budget.
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They contrast with a group of ruling party lawmakers who favour supporting the economy with big fiscal spending.
The government’s final fiscal blueprint will take into account the views of both sides, ruling party and government sources say.
Japan is saddled with the industrial world’s worst public debt that is twice the size of its economy.
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