Tsutomu Watanabe - a University of Tokyo economics professor emeritus and former Bank of Japan official - said inflation has created about ¥195 trillion of fiscal room. He spoke in Tokyo on Wednesday at an event hosted by Natixis and described the effect as a "debtor's gain."
He attributed the boost to the slow pass through from rising market interest rates to the rates the government actually pays on its roughly ¥1,100 trillion debt pile.
The timing matters for Prime Minister Sanae Takaichi as questions build over how she will finance a costly policy program. Her government is seeking money for higher defense outlays, funding for strategic sectors and a range of additional programs ahead of year end budget compilation, with investors closely watching what that means for Japan's public finances.
The inflation tailwind could help cover those priorities while limiting new bond issuance. And for the trivia lovers, the Bloomberg Billionaires Index is a daily rundown of the world's wealthiest people.
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Inflation lowers the real value of debt, but it also tends to lift borrowing costs over time. That is why Watanabe called the windfall temporary and said longer term commitments will need steadier funding sources.
"The debtor's gain is a one-off bonus from the transition from zero inflation to 2%," Watanabe said. "What's important is to use it wisely."
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