Private-sector members of a key Japanese government panel on Monday urged policymakers to be vigilant to the risks of rising inflation hurting the economy as the country's long-term government bond yields surged to 16-year highs.
The policy proposal, submitted to the Council on Economic and Fiscal Policy (CEFP), comes as Japan's headline consumer inflation rate hit 4.0% and expectations of a near-term rate hike by the central bank drove the 10-year government bond yield to its highest since October 2008.
Policymakers should watch out for the risks of food inflation dampening private consumption and of a potential surge in interest rates hurting the outlook for investment, CEFP's four private-sector members said.
"Vigilance is required that such risks could potentially reverse the ongoing economic recovery," they said.
Higher interest rates may help lift the yen and lower costs of imports, while pushing up costs of borrowing including housing loans, corporate and government debts.
Policymakers "would also need to be mindful of how increasing interest payments on government debt would affect public finances," the private-sector members said.
With the industrial world's highest public debt at more than double the size of its economy, the government's task of fixing its tattered finances is more pressing as it can no longer rely on ultra-low borrowing costs.
The private-sector members also said Japan should leverage rising inflation, wages and interest rates to help rebalance economic resources such as promoting wage growth in accordance with degree of labour shortages.
