Rising US yields, weak yen: Korea's fiscal headroom is thinner than its spending pace assumes

Long-end yields moved again in three large advanced economies: Japan's 10-year government bond yield rose as high as 2.93% on the 17th, its highest since September 1996 ^[3]; the UK's 10-year reached 5.04% on the 14th, the highest since July 2007 and the only 10-year above 5% among major advanced economies ^[10]; and a $25 billion US auction of 30-year Treasuries cleared at a winning yield of 5.216%, the highest in 25 years ^[8]. That matters for Korea because its improved budget arithmetic rests on a corporate tax windfall from the semiconductor boom, and analysts cited by Seoul Economic Daily warn against reading that as durable fiscal room, given the pace of spending growth and rising rates ^[1].

The Korean numbers are still comfortable. National debt (D1), including this year's supplementary budget, is 1,412.8 trillion won, or 50.6% of GDP ^[11]. In July, in its second-half economic growth strategy, the government cut its debt ratio forecast to 47.0%, in the same document that raised the growth outlook ^[12] - 3.6 percentage points below the current level ^[23]. With corporate tax receipts climbing on semiconductors, the national tax revenue forecast for next year was raised to more than 500 trillion won, from 412 trillion won in the medium-term fiscal management plan for 2025-2029 ^[13]. That is an upgrade of roughly 88 trillion won, about 21% above the plan ^[17]. The market now expects net treasury bond issuance next year of 65 trillion to 90 trillion won, down from 109.4 trillion won this year ^[14], a reduction of between 19.4 trillion and 44.4 trillion won ^[18].

The problem is the other side of the ledger. Mandatory spending, including welfare and transfer payments tied to population aging, is projected to grow at an average 5.9% a year, from 370.9 trillion won in 2025 to 465.7 trillion won in 2029 ^[15]. That is an increase of 94.8 trillion won ^[19] - slightly larger than the entire revenue upgrade, which covers about 93% of it ^[20]. Put differently, by 2029 mandatory spending alone would absorb roughly 93% of next year's upgraded revenue forecast ^[21]. If the semiconductor cycle turns and revenue growth slows, the shortfall is likely to be met with deficit bonds ^[16]. A cyclical windfall has been booked against a structural cost line.

The offshore examples show what that costs later. Japan's government debt ratio exceeds 260% of GDP, the highest in the world ^[2], and interest payments on that stock make it hard for the Bank of Japan to raise rates much further, entrenching the US-Japan rate gap and prolonging the weak yen ^[4]. After the yen plunged, the US Treasury intervened jointly with Japanese authorities late last month, pushing the yen-dollar rate to around 155, but it has since returned to the mid-159 range ^[5]. "If government debt piles up excessively, the Bank of Japan has to factor in the fiscal burden as well, which narrows the room for maneuver in monetary policy," said Kang Hyun-sung of SBI Liquidity Market ^[6]. US national debt rose 10.1%, from $35.4647 trillion in the third quarter of 2024 to $39.0650 trillion in the first quarter of this year ^[7], an increase of about $3.6 trillion ^[22]. The Korea Center for International Finance projects the UK's debt ratio rising from 85% of GDP in 2019 to 103.6% this year ^[9].

Watch whether the 500 trillion won revenue figure survives a memory downcycle, and where net issuance actually lands inside the 65-90 trillion won range ^[14]. Watch, too, whether the 47.0% ratio holds once the growth assumption behind it is tested ^[12].