Former BOJ Deputy Governor Says Unsustainable Debt Risks Bond-Yield Spike

Author: Spencer Ogden
Date posted22/Feb/2012
Author: Spencer Ogden

Japan’s swelling bond sales risk pushing the world’s most indebted nation to a “trigger” point where capital inflows reverse and bond yields rise, former Deputy Bank of Japan Governor Toshiro Muto said.

“It’s common sense that huge bond issuances aren’t sustainable,” Muto, 68, who served as the BOJ’s deputy chief for five years until March 2008, said in an interview in Tokyo yesterday. “I don’t know how much time we have,” he said, noting that he doesn’t see the nation reaching the tipping point in the near future.

Prime Minister Yoshihiko Noda is struggling to double thesales tax to rein in debt expected to reach 1 quadrillion yen ($13 trillion) next year just as policy makers in Europe work to contain their fiscal crisis. Standard & Poor’s this week maintained a negative outlook on Japan’s sovereign rating and warned a downgrade is likely if growth prospects weaken.

“I have no doubt that a rating cut will take place” if the government can’t raise the 5 percent sales tax, said Muto, who also worked at the Finance Ministry for 37 years and is currently chairman of the Daiwa Institute of Research. “I don’t think the cut will cause a market rout, but we have to keep in mind the unwinding of capital inflows may happen” if Japan repeatedly fails to get its finances in order, he said.

Muto was the government’s first choice to become BOJ governor in 2008, only to be rejected by the opposition-controlled upper house, who said his stint at the ministry may hamper the bank’s independence.  

Possible Favorite

He is one of the favorites to succeed Governor Masaaki Shirakawa, whose five-year term ends in April next year, according to Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo, who is also a former central bank official.

Reductions in Japan’s rating by S&P and Moody’s haven’t led to a drop in bond prices. The benchmark 10-year government bond yield was at 0.960 percent as of 11:44 a.m. in Tokyo, the second lowest in the world after Switzerland. S&P has had Japan’s debt rating on a negative outlook since April after lowering it to AA- in January 2011.

Conditions surrounding Japanese debt sustainability are changing as the debt grows faster than household assets, Muto said. Outstanding government debt rose seven times faster than growth in net household assets from a year earlier in the three months ended September 2011, according to the Bank of Japan. (8301)

Japan’s bond sales to the market will climb to a record 149.7 trillion yen for the year starting in April 1. The budget’s dependence of bonds will increase to an unprecedented 49 percent in the same year, according to the Finance Ministry.

Record Deficit

A report this week showed the nation had a record trade deficit in January as fuel imports surged because of nuclear shutdowns, and yen strength and weakness in global demand cappedexports. JPMorgan Chase & Co. (JPM) predicts Japan, the world’s largest net creditor, may need to rely on inflows of foreign capital by 2015.

The Bank of Japan last week boosted its planned government bond purchases by 10 trillion yen and set an inflation goal at 1 percent for the time being to end deflation.

“It’s appropriate for the BOJ to increase its buying ofgovernment bonds,” Muto said. If there isn’t an improvement in the economy and financial markets going forward, “the BOJ may have to shoulder a big burden depending on those developments.”

The Nikkei 225 Stock Average (NKY) reached a six-month high this week after the BOJ decision. The yen has weakened about 1.8 percent since the central bank meeting. It traded at 79.85 at 11:47 a.m. in Tokyo after rising in October to a post-World War II high of 75.35 per dollar.

The ruling Democratic Party of Japan has proposed raising the consumption tax to 8 percent in April 2014 and 10 percent in October 2015 to help pay for soaring welfare costs as the population ages. Lawmakers opposing the increase have said it may hamper the recovery from last year’s disaster.

To contact the reporters on this story: Toru Fujioka in Tokyo at; Masahiro Hidaka in Tokyo at