Japan: Bond Sale's Failure Shows Weakening Domestic Market
20 September 2002
stratfor.com
Summary
The Japanese government's most recent bond auction failed to reach its sale target, the first such failure since the current system of competitive auctions began 13 years ago. The government's financial status has become so poor that even Japanese investors are beginning to hedge their bets against the government.
Analysis
For the first time since Japan began selling its 10-year bonds in competitive price auctions in 1989, Japan failed to sell all of the bonds it placed on offer in a sale Sept. 20. The government hoped the auction would sell 1.8 trillion yen ($14.7 billion) -worth of 10-year bonds, but buyers took only 88 percent of what was available.
The majority of the bonds the Japanese government issues are used to roll over existing federal debt, which currently is at 140 percent of GDP without figuring in pension liabilities, debt linked to local governments or fresh emergency budgets that are currently under discussion. The huge debt has earned Japan a spate of credit ratings downgrades that have dropped it to the level of Malta, Kuwait and Botswana.
Japan's government is dependent upon such bond sales to maintain government spending -- one of the few things generating any growth in the economy. That has made Japan's spending policies among the most profligate in the world.
While foreign investors long have looked upon Japanese government bonds with disdain -- only 3 percent are held outside of the country -- the government's inability to sell all of them this week signals that even the domestic market is beginning to flag. The lack of interest in the bonds is potentially devastating to the government.
But even this lack of interest does not herald an imminent economic collapse. Japan still boasts a $4 trillion economy, and even while in a protracted recession it is one of the world's most technologically advanced states. However, Japanese savings now may begin pouring into non-Japanese investments -- or underneath people's mattresses -- to the degree that it threatens the government's spending priorities.
Were there some glimmer of recovery within the Japanese economy, this redirection of cash could be positive. Alas, that is not the case. When revised second-quarter growth statistics are released in November, they most likely will show that Japan's fourth recession in 12 years lingers on.
As in the past, Japan's government probably will ignore the warning signs this time around as well. The Bank of Japan typically purchases two-fifths of whatever bonds the government has on offer. Bank Gov. Masaru Hayami announced Sept. 18 that the bank would purchase as much as one-third of the 40 trillion yen ($330 billion) in stocks that banks hold in a bid to stabilize the country's rickety financial sector. The Finance Ministry, led by the groupthink-prone Masajuro Shiokawa, is likely to interpret the bond sale's failure as a fleeting development, since the Bank of Japan's resources currently are diverted elsewhere.
To think that the recent bond sale failure is merely a bump in the road would be a mistake. Japan is sinking badly, and now even its own people are starting to send their money elsewhere. |
