As market interest rates tend to rise due to the flexible operation of the yield curve control (YCC) policy by the Bank of Japan, there is a possibility that the finances of the Japanese government, which has a huge amount of public debt, will be scrutinized.
Governor Kazuo Ueda revised the YCC policy at the monetary policy meeting on the 28th of last month, raising the level of limit operations to purchase government bonds from 0.5% to 1% with the aim of suppressing the rise. Long-term interest rates have hovered around the 0.6% level as the Bank of Japan moved to ease restrictions on yields on 10-year bonds, raising concerns that the government’s funding costs will rise.
Due to the prolonged monetary easing measures centered on the YCC, the government’s interest payments have been curtailed, and the undisciplined fiscal situation has continued to deteriorate. Japan’s debt to gross domestic product (GDP) ratio is about 260%, the highest among developed countries. Fitch Ratings, a U.S. credit rating agency, downgraded the U.S. Treasury rating on the 1st, which may put a question mark on Japan’s greatly inferior creditworthiness.
Japan stands out
International comparison of outstanding debt (ratio to GDP)
Source: International Monetary Fund (IMF)
Takahide Kiuchi, executive economist at Nomura Research Institute, said, “Since the Bank of Japan will not control interest rates as tightly as it has in the past, the government will have to take responsibility for fiscal management. He said that it would be a kind of message to the government that interest rates would rise if the bank were put into operation.
Ministry of FinanceTrial calculationThen, if the 10-year bond yield rises by 1 percentage point, the national debt service allocated for interest payments and redemptions will increase by 2 trillion yen in FY2025. The national debt service in the FY2011 budget will amount to approximately 25 trillion yen, accounting for 20% of the total approximately 114 trillion yen. The accumulated interest rate, which is the premise for interest payments, was 1.1%.
Shinichiro Kobayashi, chief researcher at Mitsubishi UFJ Research & Consulting, said that while he did not believe that the YCC revision would have a short-term impact on the public finances, the downgrade of the U.S. Treasury bills “would be instantaneous if there was talk of a downgrade of Japanese government bonds. It wouldn’t be strange if there was pressure to push the rate to exceed 1%,” he said.
Until 1998, Japan’s credit rating was triple-A for all five domestic and foreign rating agencies, but it was gradually lowered as Japan’s finances worsened, and among the G7 countries, it is the second lowest after Italy.
sovereign rating
Japan is the second lowest among G7 countries
Source: Bloomberg
Yields on government bonds hit a nine-year high of 0.65% on Monday. The BOJ signaled its second ad hoc bond-buying operation this week in a sign of its determination to continue supporting the market.
Bonds Fall, Continued Selling of YCC Investment Flexibility – Bank of Japan Conducts Extraordinary Operations on Medium- and Long-Term Bonds
At this point, the Ministry of Finance is taking a calm view of market trends. Considering the enormous amount of debt outstanding, it is necessary to issue government bonds stably over the medium to long term without being bound by short-term funding costs. A senior ministry official said the BOJ’s revisions are in line with the Finance Ministry’s goal of debt management policies that focus not only on short-term cost containment but also on market functioning.
Moody’s Investors Service said in a July 31 report that the BOJ’s tweaks to YCC probably won’t create headwinds for the finance ministry. “Unless there is a fundamental change in monetary policy toward tightening, we do not expect interest rates to rise enough to undermine credit conditions for Japanese issuers over the next year.”
The saving grace for Japan is that the Bank of Japan itself owns more than 50% of its outstanding government bonds, with the remainder held by domestic institutional investors such as banks and life and non-life insurance companies. As of the end of last year, the holding ratio of foreign investors (excluding treasury discount bills) was only 6.5%.
Ueda’s insistence that fine-tuning the YCC is not the first step toward policy normalization ensures that the government continues to benefit from low-interest funding.
Chotaro Morita, Senior Fellow at SMBC Nikko Securities, said in a report dated January 1, “It is important to consider the impact on the public finances, and the Bank of Japan probably wants to avoid having the YCC revision create the image of a sharp increase in fiscal costs.” pointed out. On top of that, he said, “It is necessary to support investors so that they can invest in newly issued government bonds with a certain degree of peace of mind.”
Some people point out that the economy will not grow no matter how much investment that is profitable unless the interest rate is below 1%. Nomura Research Institute’s Mr. Kiuchi said that the BOJ’s long-term interest rate, “Even if you say you can raise it by 1%, it won’t go up to 1%, given the current situation.” It means that it was not effective,” he summed up.
2023-08-04 01:17:10
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