TOKYO Budget requests from Japanese ministries for the next fiscal year will likely top 110 trillion yen ($753.37 billion), Nikkei business daily reported on Friday, with rising interest rates on Bank of Japan's recent policy tweaks boosting debt servicing costs.

The annual budget requests, to be submitted to the finance ministry by the end of August, highlight the difficulty of streamlining spending for the industrial world's most heavily-indebted government.

Under persistent pressure to inflate the world's third largest economy, the finance ministry will scrutinise the budget requests before it compiles the draft annual state budget in December. This fiscal year's budget stood at 114 trillion yen.

Debt-servicing costs and defence spending will increase the overall budget from this year's initial budget, while social security outlay will also rise due to the snowballing costs of supporting the fast-ageing society.

For the past decade, the government has taken advantage of low borrowing costs thanks to the central bank's ultra-loose monetary policy, put in place to achieve its elusive 2% inflation target.

However, the BOJ's policy tweaks last month brought home the reality that the government cannot count on the central bank to effectively monetise its massive borrowing indefinitely.

The BOJ guides short-term interest rates at -0.1%, buying huge amounts of government bonds to cap the 10-year yield around 0% as part of efforts to fire up inflation to its 2% target.

Last month, the BOJ said it would allow the 10-year bond yield to move up to 1%, having previously raised the cap to 0.5% last December from 0.25%.

($1 = 146.0100 yen)

(Reporting by Tetsushi Kajimoto; editing by Diane Craft)