SHIZUOKA (Kyodo) The massive issuance of state bonds to fund the government’s economic stimulus program could lead to a rise in long-term interest rates, Bank of Japan Policy Board member Hidetoshi Kamezaki warned Wednesday.

In a speech to local business leaders in Shizuoka, Kamezaki said the economy is no longer in free fall and is likely to head for a mild recovery soon thanks to a slowdown in production cuts and the government’s stimulus measures. But there remains “great uncertainty” over the future prospects, he added.

He said effects of the government’s financial and fiscal policies remain uncertain and cited as one area of concern “whether the massive issuance of government bonds could build upward pressures on interest rates.”

The yield on the benchmark 10-year Japanese government bond has recently been on an uptrend, and hit a fresh seven-month intraday high of 1.545 percent Wednesday morning.

A rise in long-term interest rates weighs on the budget by increasing government debt-servicing costs and may also lead to higher mortgage rates and other borrowing costs.

Kamezaki was also cautious over the price trend, saying if the economic recovery does not take place in line with the main scenario and there is a further shortage of demand, the situation “may lead to a deflationary spiral. . . . It is very dangerous.”

The key consumer price index fell 0.1 percent in April from a year earlier for the second straight month of decline.

Kamezaki said the CPI will probably still trend downward, with the year-on-year fall reaching around 2 percent toward summer as more companies face the need to cut prices to secure sales even at the sacrifice of profit margins due to deteriorating employment and income conditions.

Although he sees the recession easing, “it would take considerable time” for corporate production and sales to return to the level seen in the past, the BOJ policymaker said.

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