Bloomberg News

BOJ Official Urges Japan to Restore Fiscal Health as Debt Rises

November 09, 2011

Nov. 9 (Bloomberg) -- A Bank of Japan board member warned that the government may see its borrowing costs jump unless it contains its growing debt burden and said officials can’t allow low bond yields make them complacent about fiscal policy.

“An event where an increase in borrowing costs would significantly exacerbate public finances wouldn’t be completely unexpected,” Seiji Nakamura said today in a speech in Naha, Okinawa, southern Japan. ’’I think we have avoided addressing the problem and have a low sense of crisis because our country has been able to secure funds with lower borrowing costs despite a persistent increase in outstanding public debt.’’

Japan, already holder of the largest burden in the industrialized world, forecasts its debt may exceed 1 quadrillion yen ($13 trillion) this year at a time when Europe’s sovereign woes have increased investor scrutiny of public finances. Japan’s credit rating has been cut by Moody’s Investors Service and Standard and Poor’s this year.

“Europe’s debt crisis has raised the Bank of Japan’s alert level,” said Hideo Kumano, chief economist at the Dai-Ichi Life Research Institute in Tokyo and a former BOJ official. "Japan is unlikely to immediately have the same problem as Europe because its debts are domestically financed, but the BOJ knows it’s a possible risk.’’

Benchmark 10-year government bonds yield about 1 percent and the nation’s benchmark borrowing costs are below 0.1 percent. Near-zero interest rates have bolstered the appeal of government debt to households and domestic investors, who hold more than 90 percent of Japan’s issuances. Persistent current- account surpluses have also been supportive of the nation’s fiscal position.

‘Lose Trust’

“Specific long-term measures to achieve fiscal health must be taken before we lose the trust of the market,” Nakamura said.

Japan’s current-account surplus narrowed less than economists forecast in September, shrinking 21 percent from a year earlier to 1.585 trillion yen, the Finance Ministry said in a report in Tokyo today. The median estimate of 19 economists surveyed by Bloomberg News was for a 31.3 percent decline.

Prime Minister Yoshihiko Noda is pushing plans to raise taxes and has warned lawmakers Japan can’t ignore the European fiscal crisis given its own state.

--With assistance from Aki Ito and Andy Sharp in Tokyo. Editors: Lily Nonomiya, Ken McCallum

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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