January 28, 2005
MOF = Ministry of Futility?
According to the Daily Yomiuri, officials from the Ministry of Finance have been travelling to major world financial centers (ie. New York and London) in an attempt to attract foreign buyers for Government Bonds (JGBs).
What's the problem with this one might ask? Wasn't everyone complaining a while back about how closed and backward the Japanese financial system is?
For starters, no one (outside of Japan, at least) in their right mind would conceivably think of buying a single JGB, let alone enough JGBs to meet MOFs fund procurement needs to meet debt obligations on the large number of domestically issued JGBs that will begin to come due in 2008. Since the government began to first issue debt instruments in 1965, it has had to rely in some form or another of coercing Japanese banks to buy the them, primarily because the returns were so low that no investor would touch them otherwise.
This worked well for a while because MOF could force banks to buy them, hold them for a year, and then sell them back to the governemnt even at below market interest rates. Beacuse of the tight control MOF weilded over the Japanese financial system, the banks had little choice but to grin and bear it. With the onset of massive bond issuance in the 1970s, and the growing government unwillingness to repurchase the bonds after a one year period, even the banks began to realize what an ill bargain it was to get stuck with government debt issued at below market rates while having to pay higher rates on short term deposits.
And as this story in the Japan Times points out, once (if) postal privitization takes places as planned in a few years, even the postal savings system, which currently holds some 90 trillion yen in soverign debt, will have to begin thinking twice about holding such a large amount of government debt.
Although it came some time later, the next move was a campaign aimed at selling JGBs to individual private investors - Japanese citizens. MOF even enlisted Fujiwara Norika to be a literal poster girl for the campaign. (Can't locate the FN poster, but check out their snazzy advertizing campaign here.) Needless to say, this approach hasn't worked all that well either and now MOF is turning to foreign investors as well.
Saith the Yomiuri:
In spite of these changes, though, JGBs have not taken off with overseas investors. The main reason for this is Japan's low interest rate policy, under
which the yield on JGBs is less than 2 percent.
The low credit rating for JGBs is also to blame. Credit-rating agency Moody's Investors Service Inc. has rated JGBs as A2, which places them lower
than those of Botswana. Given these factors, even fund managers who might want to purchase large quantities of JGBs would be unable to do so as they would face complaints from investors.
In fact, the only reason one might possibly come up with as to why a foreign investor might be intereted in JGBs is if there were expectations that the government were willing to let the yen appreciate against the dollar. At least then a profit might be turned off of the exchange rate differential. At the moment however, there seems little chance of that happening.
Another real danger here, as both the Japan Times as well as this analysis by Morgan Stanley indicate is the possibility of a bond bubble or glut. And that means that the government is eventually going to have to find a way to reduce deficit spending.
: 2:42 PM<< Home
