Japan’s bond market — the biggest in the world — could be about to get a whole lot larger if the new DPJ-led government really is changing tack on its initial pledge to cut government spending.
The Nikkei business daily reported on Thursday that the government’s ambitious spending programmes and budget requests from ministries and agencies for the 2010-11 fiscal year starting next April, will reach a record high above Y90,000bn ($1,008bn). The news, reports Reuters, drove yields on 10-year Japanese government bonds to a three-week high of 1.32 per cent on Thursday.
And yields are set to rise further amid concerns that the government will flood markets with new debt to fund its runaway spending. Since the early 1990s, the spread between tax revenues and government spending has been widening, funded by debt. As Lex noted in September, even before any mention of additional JGB issuance, this year’s budgeted increase in JGB issuance was a whopper: Y130,000bn, on top of Y846,000bn outstanding.
The prospect of hefty new JGB issuance leaves more egg on the worried face of finance minister Hirohisa Fujii (he of “to-intervene-or-not-intervene” fame), who earlier said he intends to limit bond issuance in 2010-11 to below the Y44,000bn earmarked for the current fiscal year.
It’s also quite a turnaround from just last week –when the new government was vigorously urging ministries to identify further heavy cost cuts to the country’s near-Y15,000bn ($168bn) stimulus package.
But Prime Minister Yukio Hatoyama, already struggling to fund existing policies, said on Tuesday that selling more deficit-covering bonds “may be unavoidable” to offset tax revenue shortages — code in Japanese for “it’s going to happen”.
All this weighed heavily on Thursday’s auction of five-year JGBs. No wonder that market participants reacted negatively, as Rui Xue Xu of RBS Securities Japan remarked in a Thursday note:Although it is still not clear that the additional JGB issuance would be… it has become clear that the stance of the Prime Minister on JGB issuance has completely changed compared to August, before the DPJ took the helm of the government, when he said would not increase JGB issuance.
The real concern now is whether the government will keep its promises to maintain fiscal discipline in the FY2010 budget and ensure investor confidence in the JGB market, he noted.
Already, the JGB market is bracing for another wave of supply worries and the first test will be if there is any additional JGB issuance in the current financial year. Of course, said Xu, Finance Minister Fujii did say there are “various measures” to obtain funding other than increasing JGB issuances — even if tax revenues are lower than planned. “Although there are no details about the various measures, the minister’s remarks suggest the government might still have leeway to control debt”, he concludes.
But the doubts are setting in; which makes Bloomberg’s report on Thursday that investor optimism in the JGB market is the “highest since February” all the more curious.
The bottom line, as Lex says, is that “Japan has created a monster of a government bond market that needs to be fed”. But if any market can absorb that kind of increase, it is Japan’s, it concludes, noting:
Bonds across the maturity spectrum have traded within narrow bands for years, ignoring ballooning supply. Long-term investors see JGBs as the cornerstone of their invested portfolios. That won’t change.
Another culture’s anime sums up Japan’s JGB “trap” best, it adds:
“Two decades on from its crisis, Japan has come to view debt the same way Homer Simpson views beer: as the cause of, and solution to, all of life’s problems”.
Related links:
Japan’s new ministers for disruption – FT Alphaville
Japan and Kamei – Lex
Japan’s minister of currency fluctuations – FT Alphaville
Japan’s godzillion-yen stimulus spree – FT Alphaville