Demand has risen at every note and bond auction in Japan this year, helping the nation maintain the world’s second-lowest borrowing costs on a debt burden poised to exceed ¥1 quadrillion.
Last week’s sale of 10-year notes attracted bids for 3.72 times the ¥2 trillion offered, the highest so-called bid-to-cover ratio since April. It was the sixth-straight sale of debt this year where demand increased, boding well for Thursday’s auction of 40-year bonds, the longest maturity. The benchmark 10-year yield slid to 0.94 percent on Feb. 3, within 0.5 basis point of the 14-month low reached in January.
The government said last month it may miss a target to balance its budget by 2020 and it’s struggling to garner political support for tax increases. That hasn’t sparked a jump in yields as investor demand for haven assets outweighed concern Japan will fail to repay its debt, forecast to climb 10 percent next year.
“I don’t expect a collapse of Japan’s finances within a decade,” said Takeshi Minami, chief economist in Tokyo at the research unit of Norinchukin Bank, which has $840 billion in assets. “People are buying Japan’s bonds because the country’s problems are relatively minor compared to some other countries that are faring badly.”
Greece, Ireland and Portugal sought bailouts last year in a widening debt crisis that the World Bank expects will drag the euro area into recession this year. Luxembourg’s Jean-Claude Juncker, who leads a group of euro-area finance ministers, said on Feb. 2 that steps to tighten fiscal discipline adopted at a summit last month are “largely insufficient.”
While Japan’s debt load is twice the size of its annual economic output, only Switzerland has lower bond yields among developed nations. More than a decade of deflation has marred Japan’s economy, prompting domestic banks to channel customer deposits into government bonds rather than lending.
Holdings of government debt by domestic banks climbed to a record ¥163.2 trillion in November, according to data compiled by the Bank of Japan, bigger than Italy’s economy in dollar terms. Noninsurance domestic financial companies owned 44 percent of the debt as of September, making them the biggest holder, the latest report from the Finance Ministry shows.
“Financial companies have a very large amount of excess funds,” Minami said.