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Japan may raise rates due to ‘unhealthy’ debt picture

Japanese borrowing costs may rise if the country’s fiscal condition remains “unhealthy,” with bond sales exceeding tax revenue, the country’s new economy and fiscal policy minister said.

“If the unhealthy situation continues for a long time, long-term interest rates will inevitably rise and hurt Japan’s global credibility,” said Kaoru Yosano at a news conference late Saturday in Tokyo after being appointed to the post.

Prime Minister Naoto Kan’s appointment of Yosano puts into the Cabinet a former finance minister who has advocated raising the 5 percent sales tax rate, as Kan also calls for a national debate on taking steps to reduce Japan’s debt. The Economy Minister will play a key role in gaining support for tax increases, according to analyst Kenichi Kawasaki, an economist at Nomura Securities Co.

“While Yosano’s known to be an advocate of fiscal consolidation, he’ll also be expected to help win support” across political parties to push up tax rates, Tokyo-based Kawasaki wrote in a report published yesterday.

Bond futures rose after news of Yosano’s appointment on expectations he would try to bring down the country’s deficits. Ten-year Japanese government bond futures for March delivery gained 0.02 to 140.05 as of the 3 p.m. close yesterday at the Tokyo Stock Exchange. The contracts advanced 0.34 this week.

The government is facing pressure to raise revenue because it has pledged to cap bond sales and spending to contain the largest debt burden in the industrialized world. The Finance Ministry expects new bond sales of 44.3 trillion yen ($536 billion) to exceed tax revenue of 41 trillion yen in the fiscal year starting April 1, the second year in a row for issuance to surpass revenue.

The Kan administration is also trying to jump-start an economy that may contract this quarter as stimulus measures expire and the strong yen threatens exporter profits.

Yosano signaled he agreed with the government’s decision to intervene in the currency market last September to weaken the yen against the dollar. The Japanese currency appreciated more than 14 percent against the dollar in 2010.

“In principle, Cabinet members shouldn’t make comments on the level of the yen. But, it’s natural for the government to take action if there is very high volatility” in the currency, the Economy Minister said.

Finance ministers and central bankers from the Group of 20 nations may discuss exchange rates as part of their talks on the global economy when they meet in Paris Feb. 18 and 19, Japanese Finance Minister Yoshihiko Noda said at a separate news conference yesterday.

Japan’s central bank has lowered its policy interest rate to near-zero percent and has pumped cash into markets by buying assets such as corporate debt, to try to stop deflation, a persistent fall in prices.

“It’s important to pursue an economic policy that can spur the real strength of Japan’s economy, and not simply depend on the government’s fiscal spending or excessively rely on the BOJ’s monetary policy to overcome deflation,” Yosano said.

Low public support may make it difficult for Kan to push through tax increases. His popularity rating was 23.6 percent in a Kyodo News survey published Dec. 26, compared with 61.5 percent when he took office last June.