Japan is moving into an orgy of public spending, as the government announced plans on Tuesday to issue extra bonds worth ¥10,820bn ($110bn) to fund its planned ¥15,400bn ($155bn) stimulus package, announced earlier this month. The questions are, will it work and is the bond issuance sustainable?
As Reuters notes, the extra bonds, while expected, will raise new issuance by at least a third this fiscal year to a record ¥44,000bn ($448bn), raising concerns among investors about how the market will cope with the additional supply and helping push up bond yield spreads. In fact, total new issuance may eventually reach ¥16,9oo ($172bn) worth of bonds, according to a government draft plan obtained by Reuters.
That is a lot for an economy that is already running a debt to GDP ratio skirting 200 per cent (even though it does boast one of the biggest pools of savings in the world). And it will get bigger, as Lex notes:
There will be more bond issuance under the Fiscal Investment and Loan Plan, probably of around $60bn. A shortfall in tax revenues, expected to match last year’s $460bn, would require more debt to plug the gap. Placing all this paper, and doing so without excessively distorting the market, is the conundrum all pump-priming governments now face.
On top of all this comes a ¥50,000bn scheme announced last week to allow the Japanese government to buy shares from the market if share prices fall to an extent that is seen as an “economic emergency”.The stock-buying facility, to run until March 2012, highlights Tokyo’s growing fears about the impact of the sharp fall in Japanese share prices, which hit a 26-year low last month. As Japanese banks can count a substantial level of stock holdings as part of their capital base, tanking stock prices hurt – a lot.
All the while, government agencies are moving to further cut Japan’s growth outlook as exports and capital investment plunge and domestic demand wanes. While the government is set to cut its forecast for the fiscal year through March to a 3 per cent contraction, from a previous forecast for flat growth, that is far more optimistic than private-sector forecasts of a contraction of at least 4.5 per cent.
The IMF, meanwhile, warned last month that the Japanese economy is likely to suffer a 5.8 per cent contraction in calendar 2009 and shrink a further 0.2 per cent 2010.
Although the Aso government has predicted its mega-stimulus package could add 2 percentage points onto GDP in the next year, there are no hard estimates out yet. As for take-up prospects of the monster-bond issuance plan: A 20-year government bond auction went smoothly on Tuesday – the market having factored in the new issuance plan. But analysts are already focusing months ahead, on the impact of the new issuance on auctions further down the track, after the issuance starts around July.
Clearly mindful of concerns about over-supply and rising yields, the finance minister Kaoru Yosano said on Tuesday that “it’s important that bond issuances don’t distort the market… there needs to be a careful dialogue with investors.”
Japan’s captive market — only 7 per cent or so of JGBs are sold overseas — relieves it to a certain extent from having to slug it out with US and European sovereigns in global markets, notes Lex. But, it adds, domestic appetites are finite: Households, which hold 5 per cent of JGBs, are already baulking. Last year, the government initially reckoned retail investors would be good for $62bn, but in the event they bought just $23bn, partly due to lower interest rates. The Post Office, which traditionally gobbled up savers’ deposits and recycled them into government debt, will pare back its appetite as it moves towards full privatisation. The usual buyer of last resort is still in the game. The Bank of Japan has been increasing its monthly purchases and, under generous guidelines, has plenty of headroom to go higher still.
The yield curve, meantime, has been steepening in anticipation of extra supply skewed towards the longer end; the spread between two and 20 year bonds hit a three-year high of 174bps on Monday. Higher yields, despite horrid economic data and an acquisitive central bank, imply fears of supply and an ever uglier debt profile. Servicing costs look set to follow the debt mountain higher.
The new issuance would be spread over construction bonds worth ¥7,330bn and deficit-covering bonds worth around ¥3,490bn, according to Japan’s finance ministry. The government also plans to raise ¥6,100bn by selling bonds for government agencies under its fiscal investment and loan programme, according to the draft plan.
The stimulus package that the debt will fund, meanwhile, includes tax cuts worth ¥100bn and increased subsidies to encourage companies to keep workers on their payrolls, provide corporate credit and investment in energy-efficient technology.
Will it work? According to Macquarie Securities Japan economist, Richard Jerram, the “implausibly large headline number — ¥56,800bn — for the size of the package should not be allowed to obscure the fact that a significant boost to demand is approaching.”
Some of the government’s goals, however, border on the “fanciful” - such as creating 4m new jobs by 2020, which in Jerram’s view “will be tough for an economy whose workforce is set to shrink by 8m”. Indeed.
Similarly, perhaps the best thing about the idea that the government might buy ¥50,000bn of equities is that “it is not likely to happen”, he says:Having the public sector own 20 per cent of the market would not help the productivity improvement that is necessary for economic growth in a country with a declining population. However, there appears to be determination to put a floor under equity prices.
Estimating the real size of the stimulus is tricky, he notes, as it depends in part on how many consumers and companies take advantage of the tax subsidies. But even if the figure ends up at ¥10,000-¥12,000bn, this is comparable to the biggest packages of the 1990s, especially as stimulus of about 1.4 per cent of GDP has already passed:For an economy in a liquidity trap, this looks like a sensible approach, although considering the scale of the recession, it is unclear whether it will be sufficient. The claim is that it will boost FY09 GDP by 2.0% and create 400,000 to 500,000 jobs, but this looks like an exaggeration as the implementation can probably not be rapid enough. Unsurprisingly, there are no signs that the Bank of Japan will be pressured to monetise the necessary debt issuance.
Overall, concludes Jerram, the package should help from three perspectives: First, a stronger unemployment safety net; second, financing for companies to reduce bankruptcy risk; and third, tax incentives for some products and a much larger gift tax allowance.
From the government standpoint, the monster bond and stimulus spree – complete with “fanciful” job creation programmes – should also help its flailing popularity, just at a time when an election is in the air.
Related links:
Japan to issue $110bn of bonds to fund stimulus – Reuters
Japan unveils share support scheme – FT
Japan to sell extra Y10,800bn in bonds – Bloomberg
Japanese bond issuance – Lex