Last updated: May 12, 2010 12:19 am

Japan finance minister vows to limit bond issuance

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The Greek crisis is generating a greater sense of urgency among Japanese ministers to deal with its own growing debt pile, with finance minister, Naoto Kan, on Tuesday vowing to curb next year’s debt issuance.

Mr Kan, who is also deputy prime minister, told reporters that he would do his “utmost” to keep new debt issuance in the initial budget next fiscal year starting April at or below this year’s planned Y44,300bn ($479bn).

He said that the recent market turmoil over Greece’s debt problems highlighted that: “When the market loses confidence, on top of public finances becoming more severe, it deals a strong blow to the livelihood of the people.”

Mr Kan was not alone on Tuesday in expressing his concern about the implications of Japan’s growing debt pile amid the turmoil in Europe.

Yoshito Sengoku, national strategy minister, stressed separately that Tokyo could learn from Greece’s situation and have a “stronger sense of crisis” when it comes to fiscal discipline.

However, Yukio Hatoyama, the Japanese prime minister, stressed later in the day that Mr Kan’s comments did not reflect a government decision and that deliberations for next fiscal year’s budget had not yet begun.

“Greece relies on overseas to hold most [70 per cent] of its debt, while Japan’s overseas dependence is extremely small, and this is a fundamental difference,” Mr Hatoyama said. “Our basic stance hasn’t changed in that until now we have done and must continue to keep fiscal discipline.”

Markets across the globe roiled last week amid fears of contagion from Greece’s debt crisis, prompting authorities in the European Union and International Monetary Fund to craft a mammoth €750bn ($936bn, £625bn) loan package to ease those anxieties.

In spite of Japan’s debt woes, its currency has been a safe haven during the Greek crisis given the country’s status as a net saver. Its debt, for the most part, is held by domestic investors, and local demand is strong, helping keep benchmark 10-year yields at around 1.3 per cent.

However, amid the acute focus on sovereign debt levels across the globe, worries about fiscal sustainability in the long term have prompted vocal concern by rating agencies such as Fitch and Standard & Poor’s.

Total government borrowings rose to a record Y882,900bn ($9,500bn) as of the end of March, the finance ministry said earlier this week. Meanwhile, Tokyo will probably be saddled with a budget deficit for at least another decade, Barclays Capital estimates, and this fiscal year will be the second consecutive one that proceeds from JGB issuance will exceed tax revenue.

Analysts and investors will be hoping that Tokyo does far more than curb future new debt issuance to this year’s levels when it announces its long-term fiscal consolidation and economic growth plan next month.

Xu RuiXue, a strategist at Royal Bank of Scotland, wrote in a report that Mr Kan’s pledge could be a “big challenge” without a revision of some of the measures the Democratic party, which leads the ruling coalition, has included in its manifesto.

“Amid the current environment [where] sovereign bond risk is in the spotlight, developments of Japan government debt such as the mid-term fiscal plan … should be closely monitored,” she said.

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