A failure of Japan's parliament to approve budget legislation by the end of November risks an impact on bond sales, a Ministry of Finance official said.
Opposition lawmakers are blocking authorization for 38.3 trillion yen ($478 billion) in government borrowing to cover this year's deficit as they press Prime Minister Yoshihiko Noda to call elections. The legislation needs to be approved by November for the finance ministry to hold debt auctions as planned, the official told reporters in Tokyo yesterday after an emergency consultation with 25 primary dealers obliged to bid at government auctions.
"Dealers expressed concern that a failure of the bill passage may break investor confidence in the stable issuance of government bonds," Takafumi Yamawaki, the chief rates strategist in Tokyo at JPMorgan Chase & Co., said after attending the meeting. "Should the delay in passage last longer, we cannot rule out the possibility that yields will rise."
Any holdup in the financing bill could affect a planned sale of 10-year government notes scheduled for Dec. 4. Primary dealers at the meeting expressed concern about liquidity and volatility in the bond market stemming from the budget impasse, the official said. The dealers see a risk that Japan's credit rating could be cut and called for early passage of the bill, according to the official.
Standard & Poor's said in an Oct. 15 report that "the longer that political disputes delay implementation of additional government measures, the harder it will be to fix Japan's fiscal and structural problems. Government access to cheap funds in such circumstances is neither infinite nor indefinite."
The rating company, which has an AA- grade on Japan with a negative outlook, said a week later in a report that the nation runs the risk of a credit downgrade if its "debt trajectory were to remain on its current course."
Fitch Ratings, which lowered the nation's credit grade by two levels to A+ on May 22 with a negative outlook, said last month Japan's "convoluted politics" are inhibiting policy makers' attempts to reduce deficits.
The Ministry of Finance has not prepared any specific plan on how to adjust bond sales in case the budget bill fails to pass by the end of next month, according to the official yesterday. It also does not foresee any problem in repayment of interest and principal this fiscal year, according to the official.
Japan's ratio of debt to gross domestic product will probably rise to 250 percent in 2017 from 237 percent this year, estimates by the International Monetary Fund show. The ratio is the highest globally and compares with Greece's 171 percent in 2012.
The government planned to raise 149.7 trillion yen from bond sales to investors such as banks and life insurers in the fiscal year ending March 31. The yield on the benchmark 10-year note slid 1 1/2 basis point to 0.765 percent yesterday.
Yasunari Kanematsu, who attended the bond panel from Tokai Tokyo Securities Co., said that if the budget impasse impedes the supply of bonds, it would cause a supply crunch and a drop in yields. Increased issuance after the bill passage would deteriorate the supply-demand balance, resulting in a higher volatility. (Bloomberg)
