Japan to keep record-low interest rates in FY2018 budget draft - sources

By Takaya Yamaguchi

TOKYO (Reuters) - Japan's government is set to keep an assumed interest rate at a record low of 1.1 percent as it compiles the budget for the next fiscal year starting in April, which will keep its borrowing costs low, government sources told Reuters on Wednesday.

The assumed interest rate hit a record low of 1.1 percent this fiscal year following the central bank's adoption of negative interest rate policy in 2016. The government intends to maintain the current borrowing rate assuming that the Bank of Japan's low-rate policy will continue.

Low borrowing rates will help curb the government's overall debt-servicing costs, the sources told Reuters on condition of anonymity because the plan has not been finalised yet.

The government plans to compile next fiscal year's budget draft later in December, along with an extra budget for this year.

The finance ministry earlier estimated next year's debt-servicing costs - interest payments and debt redemption - at 23.8 trillion yen (157.5 billion pounds), assuming the borrowing rate at 1.2 percent.

Debt-servicing costs account for roughly a quarter of the annual government budget. Japan has the industrial world's heaviest debt burden at more than twice the size of its economy.

The assumed borrowing rate of 1.1 percent is seen as the effective floor as the government provides a buffer of 1 percent to the market rate in calculating the borrowing cost, taking into account the risk of a sudden spike in bond yields.

The benchmark 10-year yield now hovers around 0.045 percent.

(Writing by Tetsushi Kajimoto; Editing by Kim Coghill)