By Yasuhiko Seki and Yumi Ikeda
Jun 3, 2010
SourceJapan may spark the next global debt crisis unless the nation’s new leader addresses its widening fiscal deficit, Kusano Global Frontier Co. said.
Prime Minister Yukio Hatoyama’s resignation two days ago may hamper the ruling Democratic Party of Japan’s plan to cut government debt, the world’s largest, said Toyomi Kusano, president and chief executive officer at Kusano Global, a hedge-fund research firm in Tokyo. Finance Minister Naoto Kan, who said he will run for leadership of the DPJ, has pledged to hammer out this month a mid-term plan on improving finances.
“What is bothering foreign investors the most is Japan’s debt issue and the related risk of Japan triggering the next sovereign debt crisis,” Kusano said in an interview.
Japan’s 10-year yields have stayed mostly below 2 percent in the past decade partly because domestic investors hold over 90 percent of government debt, according to Kusano. Overseas investors will start avoiding Japanese bonds as the supply of the securities exceeds local demand, Kusano said.
“Japan’s inability to finance its debt sales domestically is approaching,” Kusano said. “And when that time comes, you can’t expect foreign investors to accept Japanese debt with such a low coupon of 1.2-1.3 percent.”
The yield on the benchmark 1.3 percent bond due June 2020 was unchanged at 1.28 percent as of 10:58 a.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The yield has fallen from as high as 1.405 percent in April as concern Greece’s fiscal crisis will spread to other European economies set off a flight to safety.
“If bond yields spike, Japanese financial institutions will take a heavy blow, shaking the nation’s financial system,” Kusano said.
‘Credible Plan’
Moody’s Investors Service, which has an Aa2 rating for Japan’s sovereign debt, will be looking for a “credible plan that will assure market confidence” on fiscal policy, Thomas Byrne, a senior vice president in Singapore at the rating company, said. Past proposals that were encouraging included targets for deficit reduction and debt compared with gross domestic product, and “hard” rules for taxes and spending cemented in legislation, Byrne said.
“The clock is ticking,” Kusano said. The new government “has to address debt problems urgently.”
The Organization for Economic Cooperation and Development said that Japan’s debt is approaching 200 percent of GDP, the highest among its 31 members. Standard & Poor’s cut its outlook for Japan’s AA debt rating in January.
-- With assistance from Toru Fujioka and Kyoko Shimodoi in Tokyo. Editors: Nate Hosoda, Rocky Swift
To contact the reporter on this story: Yasuhiko Seki in Tokyo at
Yseki5@bloomberg.net; Yumi Ikeda in Tokyo at
Yikeda4@bloomberg.net