Former Japanese Finance Minister Hirohisa Fujii said failure to pass legislation to raise the consumption tax will spark ratings agency downgrades and prompt banks to sell off their government bond holdings.
Failure to pass the bill “will spark a major move in hot money,” Fujii, a senior ruling party lawmaker, said in an interview yesterday at his Tokyo office. “There will be a sell- off in government bonds and interest rates will rise. Financial institutions who hold bonds will suffer losses, so they will sell them off quickly.”
Prime Minister Yoshihiko Noda is struggling to persuade opposition lawmakers and some in his Democratic Party of Japan to back his proposal to double the five percent tax by 2015 in order to address soaring welfare costs and the world’s largest debt. Polls show more voters oppose the measure than favor it.
Fujii’s warning is at odds with previous credit rating downgrades that have failed to result in higher interest rates. Japanese banks face a total of 6.4 trillion yen ($80.4 billion) in valuation losses on their holdings of government bonds if interest rates increased one percentage point, the Bank of Japan (8301) said in a report last month.
Domestic deposit-taking institutions hold about 39 percent of JGBs, while about 8.5 percent are held by foreigners.
Japanese government bond prices have so far been unaffected by the country’s ballooning debt. The country’s credit rating has been downgraded by Standard and Poor’s four times since 2001, and over that period yields have fallen more than 52 basis points.
Fujii, 79, heads the DPJ’s tax panel and has twice served as finance minister, most recently in 2009.
The yield on benchmark 10-year bonds was 0.840 basis points at 12:31 p.m. in Tokyo, the lowest level since October 2010.
Fifty percent of voters oppose raising the consumption tax, while 40 percent approve, according to a Nikkei newspaper survey published April 23. Noda’s approval rating fell five percentage points to 29 percent, according to the survey of 924 people. The Nikkei gave no margin of error.
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