Europe’s sovereign-debt crisis is a reminder that Japan can’t expect to continue funding its public debt with “low” borrowing costs, Bank of Japan Policy Board member Koji Ishida said Wednesday.
“There’s no definite guarantee that borrowing costs will continue to stay at low levels,” Ishida, 64, said in Shizuoka. “It’s very important to maintain trust” in government debt and finances.
Prime Minister Yoshihiko Noda is aiming to compile a blueprint by the end of this month for raising the 5 percent consumption tax to cope with swelling welfare costs and the largest debt burden in the industrialized world. Benchmark 10-year bond yields rose to a four-month high of 1.09 percent on Dec. 1.
“If Europe’s sovereign-debt problems spread and lead to a disruption in global financial markets, Japan won’t be able to avoid being significantly affected,” Ishida said. “Japan’s economy will continue to decelerate for the time being because of the overseas slowdown and the yen’s gains.”
He said later at a news conference his view about risks to the economy are “largely unchanged,” while noting the BOJ needs to be “very alert about downside risks.”
U.S. 10-year rates were at 2.09 percent Wednesday and yields on 10-year Italian government debt have fallen to 5.8 percent after earlier hovering around the 7 percent threshold that led other nations in the region to seek bailouts. Rates in France are 3.2 percent.
Ishida said he’s “concerned” that the spillover effects of Europe’s crisis will weaken demand from the U.S. and emerging economies, which Japan relies on to purchase its exports.
Ishida joined the BOJ in June, making him the newest member of the Policy Board. He is a former executive of Sumitomo Mitsui Banking Corp. and served as the director of the bank’s currency trading division.
He said Wednesday that risk-aversion among investors continues to support demand for the yen, an appreciation that could threaten profits and confidence.
Ishida told reporters that demand for dollar loans from the BOJ surged Tuesday as lenders “tested” the facility after six central banks last week cut borrowing costs for the U.S. currency to ease credit amid Europe’s crisis. The joint decision will serve as a “backstop” to contain an increase in the cost of borrowing dollars, he said.
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