Jan. 4 (Bloomberg) -- Japan’s Prime Minister, Yukio
Hatoyama, swept to power by a public seeking an end to economic
and political stagnation, is failing to arrest the nation’s
decline.
Japanese gross domestic product shrank to an annualized 471
trillion yen ($5 trillion) in the third quarter, without
accounting for changes in prices, the lowest level since 1991.
The tumble is unprecedented among the biggest economies since
the 1930s, according to Paul Sheard, global chief economist at
Nomura Securities International Inc. in New York. As a result of
the contraction, the Finance Ministry projects tax revenue this
year will drop to a quarter-century low.
Hatoyama’s 2010 budget, released Dec. 25, does nothing to
rein in record deficits that threaten Japan’s Aa2 rating, said
Carl Weinberg, chief economist at High Frequency Economics. It
avoided consumption-tax increases or deregulation to boost
productivity; without policy changes, deflation and a shrinking
population risk eroding the savings pool restraining Japan’s
bond yields.
“Japan’s fiscal conditions are close to a melting point,”
said Takeshi Fujimaki, a former adviser to billionaire investor
George Soros and now president of Fujimaki Japan, an investment
advising company in Tokyo. “My biggest concern is whether the
Japanese government will be able to sell all the bonds at
auctions,” he said, adding that such failures might send 10-
year note yields climbing through 2.4 percent.
Yield Comparison
Yields on benchmark 10-year notes were at 1.305 percent at
10:30 a.m. in Tokyo -- about 2.5 percentage points lower than
comparable Treasuries, even while Japanese debt is larger than
America’s.
Auction difficulties may begin in the next fiscal year,
which starts April 1, Fujimaki said. The “tipping point” for
Japan’s bond market will come later, in about five years, said
Atsushi Nakajima, chief economist in Tokyo at Mizuho Research
Institute, a unit of the nation’s biggest bank.
For now, investors are signaling confidence in Japan’s
ability to pay its $8.96 trillion of government bonds, or JGBs -
- a total that exceeds the $8.78 trillion of U.S. federal debt,
according to June figures from the Bank for International
Settlements in Basel, Switzerland, which serves as a bank for
central banks.
Bond Auctions
Bids for the most recent auction of Japanese 10-year notes,
on Dec. 1, exceeded the amount on offer by 2.81 times. The lure
for domestic investors is that falling consumer prices mean so-
called real yields -- at about 3 percent for 10-year securities
-- are higher than the 2 percent offered in the U.S. Local
residents held 94 percent of the debt as of June, Finance
Ministry data show.
Before Japan embarked on 13 years of deflation starting in
1994, 10-year yields averaged 5.6 percent from 1988 through 1993.
Fujimaki in November 2005 advised selling JGBs, and the yields
jumped more than half a percentage point the next six months.
His bets haven’t always panned out: His April call for the yen
to fall to 130 per dollar in six months from about 97 preceded a
rally to as high as 84.83.
Yields on Japan’s 10-year government notes will rise to
1.55 percent by the end of next year, according to the median
forecast of 15 analysts in a Bloomberg News survey.
Credit-rating companies and investors and now buying JGBs
are failing to account for diminished domestic savings in coming
years, said Weinberg, 60, founder of High Frequency Economics in
Valhalla, New York, a global economy and markets research
company.
‘Mega Risk Problem’
“Japan is the mega risk problem; it’s the next big thing
that will hit the credit markets,” said Weinberg, who
previously worked at the Organization for Economic Cooperation
and Development and taught at the University of Pennsylvania’s
Wharton School. Most investors and ratings firms also missed
debacles such as the emerging-market crises of the 1990s and the
collapse of the U.S. mortgage-securities market, he said.
Investors can bet on a deterioration in Japan’s credit
quality through credit default swaps. The contracts insure
against losses on sovereign bonds during the next five years.
The cost of protecting $10 million has climbed to $68,100 from
$37,000 in August, when the Democratic Party of Japan won power,
according to data compiled by Bloomberg News. The cost was
$3,625 three years ago.
Savings Pool
Households have funded state spending because much of their
1,400 trillion yen in financial assets is being used by banks,
pension funds and insurance companies to buy Japanese government
bonds. Such purchases are unsustainable because aging savers
will want their money back, say Weinberg and Derek Halpenny, the
European head of global currency research at Bank of Tokyo-
Mitsubishi UFJ Ltd. in London.
The “large domestic pool of savings that has been there
for Japan to support the JGB market” is “going to dwindle,”
Halpenny said. “There hasn’t been much evidence of any real
appetite to tackle the core of the problem,” which is soaring
government spending and sliding revenue, he said.
Hatoyama, 60, last month announced a record 92.3 trillion
yen budget for the year starting April 1, which includes funding
for his campaign promises such as child-care allowances and
reduced tuition fees. His Cabinet also announced a nominal GDP
growth target of about 3 percent in the coming decade, with a
goal of about 2 percent for the real rate.
While Hatoyama backpedaled on some of his platform --
maintaining a gasoline surtax and asking local governments and
businesses to shoulder some child-care costs -- the measures
were insufficient to trim the government’s borrowing needs. New
bond sales were maintained at 44 trillion yen.
Shrinking Population
More than a fifth of Japanese are over 65, according to the
National Institute of Population and Social Security Research.
The nation’s population began shrinking in 2006 from 127.8
million, and will drop by 3.2 percent in the coming decade, the
Tokyo-based, state-sponsored institute estimates.
“National saving will soon decline,” leading to higher
interest rates, said Charles Horioka, a professor of economics
at the Institute of Social and Economic Research of Osaka
University and co-author of a paper with Harvard University’s
Martin Feldstein on international investment and savings
patterns. “There is an urgent need to reconstruct the finances
of the Japanese government.”
Japan’s credit rating is Aa2 at Moody’s Investors Service,
the third-highest grade, an equivalent AA at Standard & Poor’s
and AA-, one step lower, at Fitch Ratings. The U.S. and Germany
have top ratings from all three companies.
‘Stable Outlook’
“We have a stable outlook on Japan’s rating, but of course,
given that budget deficits are so high in Japan and there’s no
firm target to reduce these budget deficits, we are somewhat
concerned,” said Thomas J. Byrne, senior vice president of
Moody’s in Singapore. “There’s no clear, credible policy yet
from the new DPJ government to set a fiscal target,” he said,
adding that while Japan can “can get away with large budget
deficits” for now, that won’t necessarily be the case in the
longer term.
Japan faces the biggest fiscal gap among the Group of 20
advanced and emerging nations during the coming five years,
according to a Nov. 3 report by the International Monetary Fund
in Washington. Its deficit will remain as high as 8 percent of
gross domestic product in 2014, compared with 6.7 percent in the
U.S. and a balanced budget in Germany.
Debt Ratios
Japan’s debt is projected to be 246 percent of GDP that
year, compared with 108 percent for the U.S. and 89 percent for
Germany, according to the IMF report. Greece, whose deficit the
IMF estimates at 7.1 percent this year, saw its credit rating
lowered to five steps above noninvestment grade by Moody’s this
month and also cut at S&P and Fitch.
Because Japan’s government bonds are in yen, credit risks
are limited by the central bank’s ability to boost the supply of
money to pay the debt, said Simon Johnson, a professor at the
Massachusetts Institute of Technology in Cambridge,
Massachusetts, and former IMF chief economist.
“Typically if you have a debt in your own currency, that
can be a tax-burden issue and a burden-on-growth issue but not
necessarily a sovereign-credit issue,” said Johnson, who is
also a senior fellow at the Peterson Institute for International
Economics in Washington. “It’s not a five-to-10-year threat to
them.”
BOJ Options
Weinberg responds that the Bank of Japan isn’t capable of
creating the money supply needed to pay off the debt without
sparking “hyperinflation” -- or increases in consumer prices
so large that they destabilize the economy, such as occurred in
Argentina in the 1980s.
Bank of Japan Governor Masaaki Shirakawa and his policy
board have already cut their benchmark interest rate to 0.1
percent. The central bank released a 10 trillion yen credit
program on Dec. 1 that economists say was largely to appease
government officials and will do little to spark domestic demand.
“Japan has never really escaped from the deflation
situation of the 1990s,” said Sheard at Nomura Securities, a
unit of Japan’s largest brokerage. The central bank’s response
to the global recession and financial crisis has been “somewhat
timid,” given the risk of a prolonged decline in prices, he
said.
Shirakawa has said that adding cash to the banking system
does little to spark the spending that’s needed to drive up
consumer prices.
The economic malaise may be creating another problem by
eroding employment opportunities for the diminishing ranks of
young Japanese. The proportion of college students with offers
for work tumbled 7.4 percentage points from a year earlier to
62.4 percent, according to a November report by the Education
Ministry -- the steepest drop since the survey started in 1996.
Ayumi Okada, a fourth-year economics student at Nihon
University in Tokyo, has interviewed with 40 companies.
“I feel I’m never going to get a job offer, no matter how
hard I try,” she said.
"Finanzkrise - Wirtschaftskrise 14 (=1/2010)" 
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