The Finance Ministry is increasingly hoping to sell Japanese government bonds to foreigners. And the economic recovery is forcing this effort to be accelerated.
The ministry’s debt managers worry that the recovery will lead to a rise in long-term interest rates, which in turn will amplify the now massive public debt burden.
Most JGBs have been bought by domestic institutions. But this poses a high risk of falling demand — which means a probable jump in interest rates.
In fiscal 2000, the ministry began offering tax exemptions to foreign holders of JGBs for the first time in over a century of bond issues. This fiscal year, the ministry appears more serious and plans to grant preferential dealer status to large buyers.
All this comes in addition to the ministry’s efforts to sell to individuals on the domestic front.
Reactions from foreign investors are mixed at best, and some say Tokyo should do more to make buying JGBs easier.
“Why would you buy JGBs?” asked a Tokyo-based dealer of a U.S. financial institution. “It’s a waste of time, when you calculate in the foreign-exchange risk.”
The only reason to buy would be to meet technical requirements and hedge against Japanese stockholdings, he said.
As of March, foreigners held only 3.7 percent, or 21.4 trillion yen, out of 569.9 trillion yen in outstanding JGBs. Compare that to roughly 40 percent of foreign-held public debt in the United States or Germany.
The outstanding sum could grow to 800 trillion yen in 10 years, as the nation issues more bonds to meet interest payments, according to Kunji Okue, an economist at London-based Dresdner Kleinwort Wasserstein Securities, Ltd.
So far, the Bank of Japan, Japan Post, quasi-public financial institutions and the government itself have bought JGBs almost automatically, becoming holders of 56.8 percent of the outstanding bonds.
In the past week, the market was relatively stable. Bonds of 10-year maturity have been trading at around 1.6 percent, compared with 4 percent to 5 percent for their U.S. and British counterparts.
“There is a shortage of JGBs at the moment, with domestic investors unable to buy the JGBs they want,” said Yasunari Ueno, chief market economist at Mizuho Securities Co.
But the high demand cannot last for long, ministry officials and private economists say.
For example, once deflation ends in Japan, the BOJ’s pledge to buy JGBs as part of its ultra-easy monetary policy to keep interest rates low will no longer be upheld.
Japan Post also may be forced to relinquish its JGB holdings as postal services are privatized beginning in 2007.
The high concentration of JGBs in a few hands damages marketability, said Naoki Tanaka, head of the think tank 21st Century Public Policy Institute. The market is highly volatile, compared with the U.S. or Europe, he said.
“The JGB market is an odd place. The question of the profitability of holding JGBs is irrelevant,” Tanaka said. “Prices move suddenly, and for reasons completely unrelated (to) macroeconomics.”
Overseas demand exists, however, for JGBs.
“You can’t be a fixed income powerhouse and completely ignore the world’s second-biggest bond market,” said Susumu Kato, chief fixed income strategist at Lehman Brothers’ Asia-Pacific headquarters in Tokyo.
The New York-based investment bank is the seventh-largest private purchaser of JGBs so far this fiscal year, and aims to be in the top three.
JGBs are highly liquid, and some hedge funds and institutional investors are willing buyers, despite the low yield, Kato said.
Kato said the Finance Ministry has not been trying hard enough to reach foreign investors.
Only a small portion of the ministry’s Web site is in English, he said. For example, minutes from discussions between market participants and ministry officials are available only in Japanese.
The ministry further requires investors to register twice so they can be exempt from a 20 percent tax on accrued interest.
“Some customers will give up, just after seeing the paperwork,” he said.
In any case, the JGB market won’t become internationally popular until Japan cleans up its fiscal debt, said Sayuri Kawamura, senior economist at Japan Research Institute.
“The infrastructure and devices are set,” she said. “The problem is the economic fundamentals.”