By Yasuhiko Seki
TOKYO (MNI) – While opposition leader Shizo Abe’s push for reflationary
policies produced a short-term euphoria for Japanese financial markets, it also
bears the underlying risk of an unwanted spike in bond yields and a Japanese
version of a sovereign crisis.
The main opposition Liberal Democratic Party, led by Abe, who is seen as a
top candidate to assume the premiership after the Dec. 16 general elections,
announced Wednesday its campaign platform, calling for the need to strike an
accord between the government and the Bank of Japan to help achieve 2% consumer
inflation.
It also urged the BOJ to ease monetary policy in a “bold” fashion and
cooperate with the Ministry of Finance on the debt management, while raising the
possibility of revising the Bank of Japan Act.
“We will pursue measures to overcome deflation and the strong yen that will
distinguish us from the past LDP policies,” Abe said.
Financial markets have so far been pleased with Abe’s push for even more
drastic monetary easing, as the yen reached Y82.59 on Thursday, the weakest
since April 4, while the Nikkei 225 Stock Average has gained nearly 6% since the
lower house was dissolved on Nov. 16.
But analysts are watchful of downside risks that radical fiscal and
monetary policy measures could cause.
“More isn’t always better,” said Mitsuru Saito, chief economist at Tokai
Tokyo Securities Co, referring to the recent series of Abe’s remarks on the
conduct of monetary policy.
Abe said last week that he would consider making the Bank of Japan buy
construction bonds directly from the government. Later he denied his reported
comment on his Facebook wall, saying he wants the BOJ to buy more JGBs through
its market operations.
He also said the BOJ should consider “unlimited” monetary easing and
cutting its policy rate to zero or below zero until consumer inflation hits 2%
to 3%.
“It isn’t bad to remove old shackles but you could destroy the health of
the economy if you get it done in the wrong way,” Saito said.
“Unlimited printing of yen would shake the confidence in fiscal discipline
and the BOJ, thereby debasing the value of the yen and causing a spike in bond
yields,” he warned.
Bank of Japan Governor Masaaki Shirakawa also hit out at Abe’s call, saying
in general terms that targeting 3% annual inflation would be “unrealistic.”
Repeating his warning, he also told reporters this week that financing of
fiscal needs by central banks through underwriting of government debt would
cause an unwanted rise in long-term interest rates, pushing up borrowing costs.
Private-sector analysts are sympathetic with Shirakawa’s comments.
“If all of the policies that Abe has recently advocated were to be
realized, it would eventually trigger a spike in bond yields, which could then
become the root cause for a systemic risk, given the huge amount of JGBs held by
Japanese financial institutions,” said Takuya Kanda, chief analyst at
Gaitame.com Research Institute Co.
“If this happens, there would be no stopping the depreciation of the yen,”
he said.
The BOJ said in its financial system report that major banks, regional
banks and credit unions would incur a total valuation loss of Y8.3 trillion if
domestic bond yields increased by 1 percentage point across the board.
According to the report, major banks could sustain Y3.7 trillion in losses
as of the end of March, equal to 13% of their Tier 1 assets, while regional
banks and credit unions could sustain losses of Y3 trillion and Y1.6 trillion,
respectively.
“A spike in bonds yields would mean nothing for a country with a budget
deficit of just 20% to 30% of GDP, but it would mean a lot for a country like
Japan which has an exremely high debt level” said Junichi Makino, chief
economist at SBMC Nikko Securities Co.
“In the worst case scenario, Japan would no longer be a feasible target of
investments, but it would instead become a good target of so-called Japan
selling,” Makino said, referring to a situation in which Japanese shares, yen
and JGBs are sold simultaneously.
By the end of March 2013, the level of outstanding Japanese government
bonds will total Y709 trillion, 148% of projected gross domestic product, while
its outstanding long-term debt, including JGBs and municipal bonds, is expected
to total Y940 trillion, 196% of projected GDP, according to an estimate by the
Ministry of Finance.
As a result, Japan will be one of the most heavily indebted industrialized
nations, even dwarfing gross public debt held by Greece.
While pointing to the cost of the extreme monetary policies that Abe has
called for, analysts also question the feasibility of these measures.
“Is there a feasible tool to achieve consumer inflation of 2% to 3%, at a
time when the BOJ is already struggling to help achieve consumer inflation of
just 1%?,” asked Izuru Kato, chief economist at Totan Research Institute Co.
“Is bid spending policy, combined with underwriting of construction bonds
by the BOJ, going to revive Sony, Sharp and Panasonic?” he said.
“After all, radical polices would not do any good for Japan but would turn
out to be hazardous,” he added.
Contrary to the foregoing, some analysts voice positive expectations on the
likelihood that the LDP would offer pro-market policies.
“What sort of tools that the government and the BOJ will use are ultimately
irrelevant,” said Masaru Hamasaki, chief strategist at Toyota Asset Management
Co.
“But what is important is that the government and the BOJ make efforts to
inject more money into the financial system, remove the bottle neck of the
liquidity trap, and take measures to help overcome deflation,” he said.
“While whether the LDP can win the election and whether any of the campaign
promises will materialize need to be watched, if these polices were to be
realized, Nikkei might climb toward 15,000 and the yen might fall toward Y90,”
he said.
–email: yseki@mni-news.com
–email: msato@mni-news.com
–email: pday@mni-news.com
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