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JGBs, credit and ‘that kind of thing’: Kan’s known unknowns

by Noriko Hama

T he credit rating company Standard & Poor’s downgraded Japanese sovereign debt late last month. With an AA- rating, we are now a notch below Spain, whose possibly looming debt crisis has been unnerving EU financial authorities for some time.

Remarks on the part of Prime Minister Naoto Kan to the effect that he really didn’t know much about that kind of thing drew sharp criticism from the opposition, as well as the media. A prime ministerial comment of this sort could well have earned Japanese government bonds a further downgrade on the rating scales. The fact that it did not is probably attributable to the ambiguity of Kan’s statement.

Did anyone really understand the “that kind of thing” the prime minister was professing his ignorance about? It’s just the kind of thing that really makes Japanese politics so tragicomic.

The kinds of things Kan knows or doesn’t know should mostly be his own business. It is also up to him to decide how seriously to take such things as credit ratings produced by companies who have themselves been much discredited in the aftermath of the Lehman crisis. The kind of thing he cannot get away with, however, is being clueless about the meaning of “credit,” especially as it relates to the nation’s sovereign debt obligations.

As is often pointed out, the word credit derives from the Latin word “credere,” which means “to believe.” The Credo is an important prayer in the Christian mass. Credo cards spelling out a company’s mission statement are quite fashionable these days. Thus, the exchange of credit among economic actors is based on the assumption of good faith. You lend money to somebody because you assume the debts incurred will be honored in good time and according to agreed procedures.

I might also add that the Japanese word for credit is “shinyo,” which means precisely the same thing. To place “shinyo” on somebody means you believe in them and trust in their good faith.

One other kind of thing Kan cannot get away with knowing about is bondage. JGBs aren’t called Japanese government bonds for nothing. Nor indeed are any other kind of bonds — be they public- or private-sector ones.

“My word is my bond,” says Shylock the moneylender as he goes about his business on the Rialto among the merchants of Venice. The same words were the sacred code of merchant bankers in the City of London as it grew into the world’s single most influential financial center roughly 500 years ago. What you owe, you repay. You are bonded to that promise and it sticks to you come what may.

An interesting derivative of the term in Japanese is “bondo,” which started out as part of the brand name for a certain type of high-powered glue. Now it has become a pseudo-generic term for adhesive materials in general.

So the kind of thing Kan has to be aware of is that government bonds stick to you like leeches. They will not let go until you pay back your dues. Given that he expressed deep concern about Japan becoming another Greece back when he was finance minister, one has to assume he is at least aware of “that kind of thing.”

“I will have my bond” is another favorite phrase of Shylock’s as he weaves his cunning plot against the hated Antonio. The bond to which Shylock refers, of course, is a pound of the merchant’s flesh. This is another thing that Kan cannot afford not to know about. Defaulting on your bonds can cost you your life. It’s that kind of thing.

Noriko Hama is an economist and a professor at Doshisha University Graduate School of Business.