Monday, December 10, 2012

What Happens To Japanese Government Interest Expense if Rates Rise?

Recently there has been more talk that the Bank of Japan would increase its asset purchases again in order to create inflation there.  Given the high level of government debt in Japan, increasing inflation and rising interest rates could cause some unique problems.  In particular, rising rates would mean rising interest expense for the Japanese central government.

Currently the government spends about ¥9.8T on interest expense, which works out to about 1.23% on ~¥800T in aggregate debt.  At that level of debt, every 1% increase in the government's interest rate means another ¥8T in expense.  This implies that at a 5.2% average rate, interest expense would exceed current receipts of ¥42T.

Japan Government Debt

It's important to note that this analysis doesn't take into account the tenor of the current debt load.  Since ¥440T has a maturity of 10+ years it would take some time for interest expense to match any increase in market rates.  I also haven't modeled in any changes in the aggregate debt load.

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