Japan may need to increase dependence on foreign buyers of government bonds over time as the aging population makes domestic investors less able to purchase the securities, a Finance Ministry official said.
“Given Japan’s demographics, the current-account surplus may decrease and some even say it will go into deficit” in the long term, Masaaki Kaizuka, director of debt management at the ministry, said in Tokyo today. “We may see the need to increase reliance from abroad, whether we want to or not.”
Even as it struggles to contain the world’s largest debt, Japan has benefited from low borrowing costs because more than 90 percent of its bonds are held by domestic investors, backed by household savings. Any increase in dependence on foreign buyers would erode Japan’s advantage over countries such as Greece, which have seen bond yields soar as swelling fiscal deficits prompt global investors to sell their securities.
“Clearly, it can’t continue forever -- eventually domestic assets will shrink and Japan will have to rely more on foreign buyers” who will demand higher yields, said Naoki Iizuka, senior economist at Mizuho Securities Co. in Tokyo.
Echoing remarks made yesterday by Prime Minister Yukio Hatoyama, Kaizuka said the nation’s debt problems are different from Greece’s because most of Japan’s bonds are held by domestic investors. Still, Greece’s fiscal woes are a lesson and Japan needs to improve its financial condition, he said.
Even with a debt load that’s a multiple of Greece’s, Japan manages to keep its borrowing costs down because “risk- averse” households save their cash and financial institutions invest the money in government bonds, Iizuka said.
Low Yields
Ten-year yields have held below 1.4 percent for most of this year, and were at 1.3 percent at 4:10 p.m. in Tokyo. In contrast, Greece’s equivalent bonds yielded 7.81 percent at the market opening today.
Overseas investors held 6.2 percent of Japan’s government bonds as of the end of December, according to the Bank of Japan’s quarterly flow of funds report.
An effort by the government earlier this decade to drum up foreign interest in the bonds failed to see the share of ownership reach 10 percent. Those roadshows were the first time the country had marketed bonds overseas since 1904, when officials sought to pay for a war against Russia.
Fitch Ratings last month cited dwindling savings as one reason why Japan’s swelling debt burden may put pressure on the country’s AA- credit rating.
Dwindling Savings “The slow but steady drop in the savings rate could eventually undercut the sovereign’s ability to fund itself domestically at low nominal yields, leaving it more exposed to interest-rate and refinancing risks,” Fitch said on April 22.The aging population will cause government pension costs to surge and reduce the pool of household assets as retirees draw on their savings, said economist Toshihiro Nagahama. He said the retirement of baby boomers -- those born between 1947 and 1949 -- may strain the public coffers as soon as 2012.
“That may be when Japan’s sovereign risk becomes evident,” said Nagahama, chief economist at Dai-Ichi Life Research Institute in Tokyo.Almost 23 percent of the nation’s 126 million people will be older than 65 this year, the highest proportion in the world, according to Bloomberg data.
Public debt totaled a record 882.9 trillion yen ($9.5 trillion) as of March 31, up 4.3 percent from a year earlier, the Finance Ministry said this week. Households’ financial assets stood at 1,456 trillion yen as of Dec. 31, Bank of Japan figures show.
Debt Ratio
Japan’s debt is projected to be 246 percent of gross domestic product in 2014, the International Monetary Fund said in November. The IMF this week said Greece’s debt will peak at 149 percent of GDP in 2013.
Kaizuka said Japan’s borrowing costs are likely to remain low for the time being.
“I see the merit of issuing long-term bonds because yields are staying at very low levels,” he said at today’s conference. “So we can reduce the risk for debt repayment in the future and benefit from low rates for a relatively long time.”
The government is scheduled to release a strategy next month for containing the debt burden. Finance Minister Naoto Kan said yesterday he wants to keep new bond sales for the year starting April 2011 below the record 44 trillion yen budgeted for this fiscal year.
Iizuka at Mizuho said the government needs to map out a “feasible, credible and sustainable fiscal plan” and the current-account surplus remains a “clear strength.”
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