Monday, June 21, 2004

John Dizard at the Financial Times (sub. only) thinks the world may have had its fill of Japanese government debt.

the BOJ does face a real problem. It has only been an independent central bank for a few years, but if the economy continues into recovery, it could be forced into serving as a receptacle for Japan Government Bonds. . . .

The Japanese city banks have been cutting back on the average duration of their JGB holdings, from nearly 3.6 years last year to just over 3 years as of March 31. Also, "real money" foreign investors, as distinct from those cynical, nasty speculators, have been selling off their JGB holdings.

The Japanese public has been shifting back into the stock market.

This lack of interest in the Japanese government's paper is disturbing to the officials at the Ministry of Finance, who have to issue 36.6 trillion yen of new bonds before next March 31. . . .

Talk has been going around, unauthorised talk, that the BOJ has been concerned that it could be required, informally, to effectively peg JGB rates at something like 2 per cent or 2.5 per cent; in other words, some level not far from today's rates. Informal requirements in Japan are taken very seriously. . . .

If the BOJ had to sit there and buy a whole bunch of bonds, the yen would be under deeper liquidity than the Titanic. Or it would as long as there were no capital controls to keep Japanese investors from fleeing the country in a disorderly manner.
In the US, over half of all treasuries are owned by foreigners, and recently Asians are about the only ones in the market for US government debt. In Japan, however, some 97% of Japanese Government Bonds are held domestically. Thus Dizard sees no overseas white night to save the Japanese bond market.

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