In Focus: Japan’s Rock-Bottom Bond Yields Belie Its Outsize Debt Problem
The month of June has gotten off to a gloomy start in Japan, just as it has elsewhere, among fears that in addition to the economic and political problems in the Eurozone, the wheels have fallen off the U.S. recovery. While Japanese stocks have fallen as investors bolt for safe havens, that has been good news for Japanese bond investors: Japanese government bonds are among the beneficiaries of that move, with the rise in price pushing the yields down to the lowest levels recorded since June 2003. The yield on the 10-year benchmark notes fell to only 0.8% last Friday; the Ministry of Finance is preparing to auction off 2.3 trillion yen of new 10-year notes tomorrow.
The low yields are particularly intriguing in light of the fact that Fitch cut its ratings on Japan’s sovereign debt to A-plus – on a par with debt issued by such peripheral economies as Estonia and Malta, and below the local currency ratings for rival Asian market leaders, China and South Korea. Still, with 93% of Japan’s bonds held by domestic investors, this is far less urgent than it might otherwise be; the country isn’t going to have trouble completing tomorrow’s auction, or funding itself, in the near future. Indeed, as the last several days have demonstrated, its bonds still have the status of “safe haven” assets.
Still, as the chart above demonstrates, Japan clearly has a debt problem. In announcing the downgrade, its first for the country’s debt in more than a decade, Fitch warned that by the end of 2012, Japanese debt will hit almost 240% of GDP. (For its part, Greece’s debt makes up a mere 150% of GDP.) That is clearly not sustainable – but the government is struggling to make any progress on a bill that would raise taxes to help rein in the budget deficit, currently adding to the already-hefty debt load. Prime Minister Yoshihiko Noda is putting his political career on the line by arguing in favor of a plan to double the consumption tax by 2015, to a rate of 10%. A familiar austerity versus growth debate is taking shape at the other side of the world from Europe, as Noda’s political opponents argue that Japan simply can’t afford the impact that measure would have on growth levels, while his supporters contend that without the tax, there will be no way to fund pension payments and other programs. On the sidelines is Fitch, which warned that the country’s efforts to come to grips with its problems look “leisurely” even when compared to those of debt-laden European nations.
Certainly, those who complain about a lack of growth have plenty of evidence to cite. After steep gains in the 1980s and 1990s, Japanese GDP growth has basically flatlined, and more recently retreated. Last year’s tsunami, of course, was a devastating blow not only to the country’s infrastructure and its citizens, but to Japan’s economy. And ironically, the fact that Japan’s citizens may prefer to invest in its government bonds than in riskier enterprises may have undermined economic growth. And it becomes a circle, as Fitch pointed out, arguing “weak nominal G.D.P. growth threatens to undermine fiscal solvency in the longer term.”
The country’s picture isn’t altogether bleak, of course. Its economy bounced back in the first quarter, growing at nearly double the rate of the United States economy. Growth of 1% for the quarter – or an annualized rate of about 4.1% for 2012 as a whole – is an impressive achievement, coming despite the lingering aftereffects of the tsunami and the slowdown in two key Japanese export markets, the United States and China. In the same period of the prior year, Japan’s economy shrank by 2%. Rebuilding of the tsunami-stricken region and government spending helped propel the growth rate higher, but the gains also came from solid private sector spending and even some improvement in the country’s exports.
Japan, like other major developed nations, must solve its own debt crisis and find a way to balance growth and fiscal discipline. Thankfully for the country and its aging population, it is coming under less pressure from global financial markets to act immediately – at least, for the time being.
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