The ad goes on to say, ‘As people looking for a marriage partner these days have to make more of a conscious effort to find the right partner, one cannot hope to engage in fruitful activities without knowing what ideals women hold. We have conducted an urgent survey to determine the ideal marriage partner whom women are looking for. We present our findings here.’

The ad concludes, ‘Men who hold JGBs (Japanese government bonds) are popular with women! Right!?’

The wire report quotes a market insider as saying the ad campaign ‘strikes of desperation.’

I’m not sure if it’s good news, but if this is accurate, there are plenty of popular men around, so to speak.

The most popular would be the Japan Post Bank Co., which holds more than 150 trillion yen (US$1.74 trillion) in government bonds.

Other major bond holders are the public pension program with 80 trillion yen; Japan Post Insurance Co. with 70 trillion yen; life and nonlife insurance companies with 60 trillion yen; the Bank of Japan, also with 60 trillion yen; and corporate pension funds with 30 trillion yen.

We can add a newcomer to that list, China, which this year has focused on buying up short-term bonds of less than one year maturity.

Over the course of a year, the Japanese government issues 160 trillion yen in government bonds, which works out to 500 billion yen worth of bonds on a daily basis.

This is all happening even though Japan has not recently lost a war, nor has it been hit by a natural disaster on the scale of the Great Kanto Earthquake.

Japan has become a debt superpower because of years of throwing money at various problems, coupled with the effects of deflation.

This fiscal year’s budget called for the issuance of 44 trillion yen in government bonds despite projected tax revenues of only 37 trillion yen.

The last time the budget had more debt than tax revenues was in fiscal 1946, the year after Japan’s defeat in World War II.

Japan’s bond market remains stuck at a high level. Meanwhile, long-term interest rates are stable and very low because the surplus in funds is flowing toward investment in government bonds.

The level of overall savings in Japan remains on the plus side. Moreover, Japan still has a current account surplus.

At the same time, Japan continues to suffer from deflation, and corporate plant and equipment investment remains weak.

Rather than lend to companies, Japanese banks continue to buy up bonds that have the backing of the government.

Moreover, about 95 per cent of Japanese government bonds are owned by Japanese investors. Of that figure, 60 per cent is held by Japan Post Bank and other financial institutions.

While this situation could be described as a government bond bubble, there is none of the fervor that is commonly associated with an inflated economic bubble. This bubble is being puffed up at low temperatures.

Funds are flowing to government bonds through a process of elimination that leaves investors with no other advantageous alternative to place their money.

However, the risks are intensifying.

Because of Japan’s rapidly aging population, the rate at which savings are being eaten into will only accelerate. If the savings rate should decline, the flow of funds from financial institutions to the bond market will weaken.

The biggest risk factor will probably be Japan Post Bank. This is because 80 per cent of the funds it has accumulated have been placed in government bonds.

Depositors can withdraw their Japan Post Bank savings at any time. If the bond market should collapse, a huge amount of Japan Post Bank savings would likely be withdrawn.

If government bonds were sold off to obtain funds to pay out those withdrawals, bond prices would only further plummet.

If Japan Post Bank should face a financial crisis, it would shake the bond market at its very foundations.

Ratings agencies around the world are casting a harsher eye on Japanese bonds.

Early this year, Standard & Poor’s changed its rating of Japanese government bonds from AA (stable) to AA (negative).

At June’s Group of 20 summit meeting, a declaration was approved to halve the debts of advanced economies by 2013. Japan, however, was not included in that pledge.

One reason may have been that, unlike other nations’ acute fiscal deterioration, Japan’s condition was judged as being chronic even before the collapse of the US investment bank Lehman Brothers that led to a global financial downturn.

Consideration may also have been given to the unique market environment of Japan, where sufficient funds exist to buy up all government bonds domestically.

If that is the case, Japan was given exceptional treatment on the basis of its uniqueness.

However, the uniqueness that appears to contribute to the stability of the ownership structure of Japanese bonds has the potential to quickly degenerate into fragility.

One factor is the homogeneity and synchronicity of that structure.

The funds now held by Japan Post Bank and Japan Post Insurance have for many years been included in the structural framework for public finance. Life insurance companies and commercial banks are unable to shake off the ‘convoy mentality’ ingrained through financial regulations.

All those institutions are heavily dependent on government bonds. If bond prices should fall, there is the strong possibility, from a risk management standpoint, that all those institutions would simultaneously try to sell off their bonds.

Such a situation occurred in 2003 when government bonds suffered a sharp fall.

The other factor is the closed-door nature of the government bond market.

That nature has helped repel attempts by hedge funds to short sell government bonds. At the same time, that has prevented the formation of a network with foreign stakeholders who could share the risks.

If bond prices should collapse, a flood of funds would flow out of Japan, leading to a collapse of the yen. That would inevitably have a huge effect on the world’s finance and economy.

In such a situation, Japan could find itself isolated in the international arena with few stakeholders on its side.

In September 2009, at a Cabinet meeting shortly after the Democratic Party of Japan came to power, then Finance Minister Hirohisa Fujii said: ‘Ratings agency are targeting Japanese bonds. If they should take action, things could become very difficult.’

Yoshito Sengoku, who was then serving as state minister in charge of government revitalisation, responded: ‘You are right. The most important point for this administration will be stabilising the bond market.’

Fujii now says: ‘There are limits to depending only on selling bonds domestically. We have to increase the amount of bonds sold abroad. If that happens, stronger pressure will arise from abroad about the fiscal condition, but that cannot be helped.’

Last month, the International Monetary Fund, in its annual report about Japan, ‘underscored the urgency of credible fiscal adjustment. The key challenge is to bring down public debt to more sustainable levels.’

The IMF recommended that Japan gradually raise its consumption tax rate from the current 5 per cent to 15 per cent over a 10-year period from the next fiscal year.

Until now, the low consumption tax–as compared with rates in other advanced economies–was viewed as a strength that allowed Japanese to shoulder more of a tax burden.

However, if as a result of the July 11 Upper House election, the ruling Democratic Party of Japan gets cold feet about the consumption tax, the situation will change.

The markets will be mercilessly checking for discipline in the fiscal 2011 budget and the effectiveness of the government’s growth strategy.

The ability of Japan’s political leaders and their policymaking skills for restoring the nation’s fiscal health will be severely tested.

Japan will only have at best three or four years to pull off that task, in the view of both the market and the IMF.

In discussing the consumption tax issue, there is a need to not only take into consideration fair treatment for all generations and the maintenance of the social security structure, but also the need to manage the government bond market.

Only through a serious dialogue with the government bond market will the discipline and course required for Japan to rebuild its fiscal condition be made clear. That would also make possible a prevention of the collapse of bond prices and a soft landing for the economy.

Stability that relies on things being done behind closed doors lacks the restraint and balance that only come from an open-door policy.

Japan must switch from the risks attached to being a closed nation to those that may arise from opening up its doors.

An urgent task is to distribute risks over a wider range of stakeholders.

Young Japanese men who should be popular if they owned government bonds are said to be in love with savings. They may be resigned to not depending for their own futures on a nation that has no growth, has no increase in tax revenues and has a fiscal deficit that continues to balloon.

However, the money that those young men are depositing in financial institutions is being used to continue to buy government bonds.

The bond market is blowing bubbles from a uniquely Japanese glass castle.

If that should collapse, everyone in Japan, young and old, men and women, will suffer.

There will be no generational war because everyone will lose.

This article first appeared here in Asahi Shimbun.

 

Yoichi Funabashi is editor in chief, Asahi Shimbun.