As concerns about the risks of global sovereign debt swirl through the markets, Shizuka Kamei, Japan’s financial services minister, has added to the anxiety with comments that have sparked fears that one of the world’s most indebted countries could face a drop in demand for its debt.
Within days of Standard & Poor’s sounding the alarm over Japan’s fiscal health, by warning that it might lower Japan’s credit rating, Mr Kamei raised eyebrows by calling for one of the largest buyers of Japanese government bonds – Japan Post Bank – to buy more US Treasuries and corporate bonds instead.
The FSA minister, who is preparing measures to encourage savers to put more of their money into post office accounts, suggested that this additional inflow could be invested in non-JGB assets.
“We would like to diversify [the postal bank’s] investments,” he said.
Mr Kamei’s stance has been greeted with bafflement.
“I am …shocked by his comments,” says Allan Bedwick, who runs a global macro fund at OGI Capital Partners in Tokyo.
By making such comments, Mr Kamei “runs a serious risk of spooking the domestic investment community,” which buys the bulk of JGBs, he says.
Japan’s dire fiscal health has been a cause for concern for some time. With a weak economy and ageing society, gross Japanese government debt is creeping relentlessly towards 200 per cent of GDP.
Those who worry about Japan’s debt mountain point out that the savings rate has been declining for decades and could soon turn negative as the population ages. This will lower the banks’ ability to take on more JGBs, just as the government needs to issue more debt to cover its ballooning budget deficit.
The finance ministry forecasts that new bond issuance of Y44,300bn ($487bn) in fiscal 2010 will rise to Y55,300bn in 2013. Thus the idea that the postal bank, which holds about a quarter of outstanding JGBs, might diversify its investments is not a comforting thought.
“They don’t have to start selling, they just have to stop buying and it would have a huge effect on the market,” says Mr Bedwick.
Nevertheless, many analysts, including Mr Bedwick, do not expect a crisis anytime soon.
Deposit-taking banks, including the postal bank, held 42.5 per cent and insurance companies another 20 per cent of outstanding JGBs at the end of September last year. Foreigners owned just 5.8 per cent, according to Ministry of Finance data.
Japanese financial institutions will likely continue to support the JGB market because they have no other choice, many analysts say.
Japanese household savings – that is, disposable income minus consumption – are increasing. The weak economy has meant corporations are also saving, rather than investing and bank lending has been shrinking.
As a result, domestic banks “have more and more cash to buy JGBs,” Mr Bedwick says.
Under international capital rules, JGBs have a zero risk rating, which means banks will continue to want to hold JGBs, adds Kyohei Morita, chief economist at Barclays Capital in Tokyo.
Ironically, despite an ageing population, the high level of government debt will force future generations to reduce consumption and save more, says Takahide Kiuchi, economist at Nomura in Tokyo. This will, in turn, spur deflation, keeping rates low in a vicious cycle, he says.
Nobody denies that the combination of a high level of debt and grim economic growth prospects is worrying.
But widespread complacency about Japan’s fiscal situation could be the biggest cause for concern, says one hedge fund manager.
“The consensus is overwhelmingly that this is a disaster waiting to happen but it’s not going to happen yet, which is probably the single most convincing factor that it will happen sometime sooner rather than later,” he says.