Tetsushi Kajmoto, Leika Kihara

TOKYO (Reuters), Japan’s new Prime Minister Fumio Kishida might have to issue more bonds in order to finance his panademic relief package that will cost hundreds of billions. Even if the money is repaid from prior stimulus programs.

Kishida is a former foreign ministry minister who was known for advocating fiscal reform. He won Wednesday’s ruling party leadership race, which assured him of becoming prime minister next week because of his party’s strong majority in Parliament.

Kishida, eager to provide a boost to the economy hit by pandemics, promised to create a package of stimulus funds worth several tens to trillion yen. At one time Kishida flagged a value of about 30 trillion yen ($270billion).

Analysts say that although some of the funding could come from shifting around 20 trillion yen leftover from previous stimulus programs, it won’t suffice to fund all of them.

Chotaro Morita of SMBC Nikko Securities, chief bond strategist, stated that Kishida needs new bonds in the range of 9-12 trillion yen if he wants a package worth 30 billion yen.

Chief bond strategist for Mizuho Securities Noriatsu Taki predicted a new bond issue of less than 10 billion yen.

The record-breaking 221 trillion Japanese yen would be added to the bonds due to be issued in Japan’s current fiscal year through March 2022. This will strain Japan’s finances, and put doubt on Kishida’s credibility as a fiscal conservative. Kishida has long called for the government to reduce its massive debt.

Kishida is conscious that he needs to attract votes for the general election in late this year. He has therefore called for greater wealth distribution to households with low or middle income via payouts.

However, he lacks details about how the funds will be funded. Kishida does not believe Japan should raise the sales tax.

According to private estimates, while he suggested raising the rate of financial income tax, an increase to 30% instead of the 20% current rate only raises tax revenues by approximately 400 billion yen.

The state’s finance ministry, which is in charge of creating debt issuance plans and maintaining the budget, anticipates that it may have to issue even more bonds to pay for Kishida’s wish list.

A senior government source said that while the exact size of the relief package will vary, the actual expenditure to address immediate pandemic needs for affected households and businesses could amount to 5-6 trillion yen.

Rest of the funds could be used for non-spending purposes, such as government credit guarantees or loan programs.

The government source stated that extra spending could be funded through additional bond issuance. This was despite the sensitive nature of the issue.

He said that it was possible to issue additional bonds without raising yields due to Bank of Japan’s extremely-easy monetary policies.

The bond market is also cautious over potential spikes in bond yields caused by the BOJ. It has pledged that it will keep long-term borrowing cost at zero as part of its yield curve control policy (YCC).

Haruhiko Kuroda, Governor of BOJ said Thursday that a mixture of large fiscal spending and low interest rates had created a positive synergy for the economy.

“Regardless of any fiscal, regulatory, or other policy the new government pursues,” he stated.

($1 = 111.3000 yen)