The government is set to sell long-term bonds exclusively to individual investors beginning in March — the first time it will have issued such debt in Japan. On Feb. 3, it started accepting subscriptions at private financial institutions and post offices. Subscriptions for the first week reportedly exceeded quotas at some places, indicating a strong demand for government bonds.
Such bonds can be a double-edged sword, however. On the one hand, they offer individual investors a new investment opportunity at a time of zero-percent interest rates. Moreover, bondholders will become more concerned about public administration and finance. On the other hand, the government runs the risk of dipping more deeply into the huge reserve of personal savings to finance its ballooning deficits.
These bonds, available in units of 10,000 yen, can easily be purchased by anyone. They may be especially attractive to wealthy individuals because no limit is set on the amount that one person can purchase. Risks, if any, will be minimal, because the interest rate will be adjusted regularly in accordance with market rates. Transactions have been simplified, and can be made through bank accounts.
Government bonds are considered a safe investment, particularly at a time of “negative” interest rates on savings accounts (including bank charges) and falling stock prices. This is a chief selling point. Currently, however, individual bond holdings are extremely limited — only 10 trillion yen out of 410 trillion yen in outstanding bonds. Since price trends are set largely by banks and other large institutional investors, there is little room left for small ones.
By contrast, bonds targeting individuals will be traded outside the market. They can be cashed in before maturity because the Bank of Japan is committed to buying them. Price and interest-rate risks can be avoided under the floating system. All this will make it unnecessary for bondholders to keep watch over shifting trends in the bond market.
Of course, safety is a key element, but there ought to be other reasons why individuals should be induced to buy government bonds. In this sense, it is worth noting the issuance of municipal bonds by some local governments to finance public projects. A case in point are the bonds issued by Gunma Prefecture last March to build a hospital. The issue proved so popular that it sold out in just several hours. After that, Hyogo and other prefectures sold similar bonds to finance their own projects, such as the construction of disaster-prevention facilities.
All these prefectural bonds were issued after potential investors were informed in advance about the specific purposes of the projects involved. They also have one common message: The revenue will be used entirely in the general interest of residents. In Gunma’s case, according to a prefecture official, its bonds — dubbed “aiken” (love your prefecture) — have helped to “bring the administration and residents together and encourage their political participation.”
Having no such specified uses, the new national bonds differ from municipal bonds. But, at the very least, they will increase public awareness of the fiscal crisis and make citizens more concerned about how the government uses their funds. In short, bond issues will acquire a new meaning if they create a shared sense of interests between the government and members of the public who invest.
It would be pathetic if the government, finding it increasingly difficult to raise money in the market, simply wants to tap into the 1,400 trillion yen in personal financial assets. The Finance Ministry justifies the planned bond sales to individuals as correcting a heavy tilt toward savings deposits. With these issues likely to exceed 1 trillion yen annually in coming years, however, they should not be used solely as a means of covering the budget deficit.
Individual investors, meanwhile, need to remember that government bonds, however safe, are not completely risk-free. With the bond market already glutted, there is the possibility that international ratings on Japan’s sovereign debt will be downgraded further. Some overseas rating firms, it should be noted, already place Japan well below other major industrialized nations.
The rush of subscriptions indicates the underlying strength of bond investments targeting individuals. There is no assurance, however, that people will continue to snap up government bonds. If they stop doing so in the future, leaving a chunk of debt unsold, it will probably signal a further decline in Japan’s bond ratings. It behooves the government, therefore, to tighten fiscal discipline as best it can and to keep the public informed about how it intends to meet that test.
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