Japan must avoid unforeseen spike in bond yields, govt panel members say

By Leika Kihara

TOKYO, May 26 (Reuters) - Japan must avoid causing an unforeseen spike in interest rates amid heightened market concern over its finances, private members of a key government economic panel said on Monday following rises in super-long bond yields to record highs.

The Council of Economic and Fiscal Policy members also said Japan must focus on sustaining wage gains, rather than resort to tax cuts, to help households cope with rising food costs.

Japan's 40-year government bond yield hit a record 3.675% last week while the 30-year yield climbed to an all-time high of 3.185%, as mounting political calls for tax cuts and big spending drew investor attention to its fiscal woes.

Japan must restore fiscal health while revitalising the economy "to avoid heightening market concern over its long-term fiscal sustainability and causing an unforeseen rise in interest rates," the panel members said.

Prime Minister Shigeru Ishiba has pushed back against calls to cut Japan's consumption tax rate, warning that doing so with additional debt issuance would worsen the country's dire fiscal state.

"Consumer sentiment is worsening due to persistent inflation mainly for food. Rather than resort to tax cuts without a source of funding, Japan must expand the economy and ensure wage hike momentum is sustained," the members said.

The panel's proposals lay the groundwork for the government's discussion on economic policy.

Japan's economy shrank for the first time in a year in the January-March quarter on stagnant consumption and falling exports. Analysts expect U.S. tariffs to further weigh on the export-heavy economy and some project another contraction in the second quarter.