Translation: Japanese bankers are against growth because it might cause losses from rate hikes?

Japan Must Overhaul Taxes to Avoid Bond Rout, Bank Lobby Says

By Shigeru Sato and Takako Taniguchi

April 1 (Bloomberg) — Japan must avoid delaying an overhaul of the tax system to prevent government borrowing costs from spiraling in the next decade, the new chief of the country’s banking lobby said.

“The risk of a tumble in government bond prices would increase if taxation and social security reform are left unsolved for years,” said Yasuhiro Sato, president of Mizuho Financial Group Inc. (8411), whose tenure as chairman of the Japanese Bankers Association began today. “The country’s financial assets are dwindling with the aging population dipping into savings.”

Japanese banks hold a record amount of the nation’s bonds, prompting central bank Governor Masaaki Shirakawa to warn in February that lenders risk incurring trillions of yen in losses if yields rise. Prime Minister Yoshihiko Noda faces opposition to his plan to double the sales tax by 2015 to pay for swelling welfare costs and contain the world’s biggest public debt.

“Any delays to the reform that’s being debated may raise concern that bonds may be unable to be absorbed domestically in the long run, say, in 2022,” Sato said in an interview last month. “But there are no signs of a JGB price plunge in the near term.”

Japan’s 10-year bonds yielded 0.985 percent late on March 30. The cost to insure Japan’s debt against nonpayment has been falling, with CMA data showing five-year credit default swaps declined to 98.6 basis points on March 29 from a record 154.8 on Oct. 4, indicating perceptions of creditworthiness are improving.

Hoarding Cash

Shirakawa said in February that a 1 percentage-point increase in benchmark yields would cause losses of about 3.5 trillion yen ($43 billion) on notes held by major banks. With households and companies hoarding cash rather than borrowing, lenders have been buying bonds, holding a record 167.8 trillion of sovereign debt in February, according to central bank data.

The International Monetary Fund dispatched a mission to Tokyo last month as part of a regular review it’s conducting this year into the stability of Japan’s financial sector. While the IMF’s Financial Sector Assessment Program contains a stress test for banks, brokerages and insurers, it’s unclear whether it will examine risks from their government bond holdings.

“Japan’s financial system is strong and stable,” Sato said. “It’s hard to imagine that the IMF would make any kinds of requirements for Japan” based on any examination of bonds held by financial institutions, he said.

Bond Profits

The nation’s three biggest lenders — Mitsubishi UFJ Financial Group Inc. (8306), Sumitomo Mitsui Financial Group Inc. (8316) and Sato’s Mizuho — earned a combined 231 billion yen from trading bonds and other securities in the quarter ended December, almost double from a year earlier, according to Bloomberg calculations based on their latest earnings figures.

Japan’s government bond sales have largely been absorbed by the domestic market, with about 92 percent of the debt owned by investors at home, central bank data show. The capacity of households to fund public spending may decline in coming years as the growing ranks of pensioners withdraw assets.

Households had 1,483 trillion yen of financial assets at the end of December, down 0.3 percent from a year earlier, according to the Bank of Japan. Government borrowings will climb to 1,086 trillion yen in the year ending March 2013, the Finance Ministry forecast in January.

Prime Minister Noda is seeking parliament’s approval of his tax bill in the current Diet session, while opposition Liberal Democratic Party leader Sadakazu Tanigaki has suggested elections should be called first. Noda’s Cabinet on March 30 approved the proposal to raise the sales levy to 8 percent in April 2014 and 10 percent in October 2015.

“Japanese banks conduct their own simulations and assessments of various risks such as those arising from bonds and stocks,” Sato said. “We are now far from the situation where a bomb may explode in the near future.”

16 Responses

  1. The International Monetarist Frauds dispatched a clown troupe to Tokyo as a part of a regular waste of time to ensure Japan’s Financial Sector was indeed hoarding 65% of the nations sovereign financial assets.

    “They basically shot a lot of seltzer water at everything and then left.” Sato said. “It’s hard to imagine the IMF examining anything but a bar menu.”

    The troupe had to cut short their visit when one of them was struck in the head by a passing Bosozuko while chasing a 1000 yen note across the street. Said Lagarde, “While the car was heavily damaged, no one at the IMF really uses their head anyway. We just had the doctors fill his skull with rocks until it was about the right shape and the patient was able to return to fiscal policy discussions the next day.”

    1. @Unforgiven,

      thanks for the best laugh all week;

      This Catch-22[to the 22nd power] is so surreal that we have to laugh to keep from crying over all the spilt options (and blood).

      1. @roger erickson,

        It helped me to get it out. Glad it helped you too. Must remember to breathe…

        Warren’s got to be a master at it by now. Keep Buggering On…

  2. Why would the banks have losses on rate hikes? It’s still the same margin for then right? So is it less lending activity? But the banks aren’t lending much now anyway…other than for student loans, which appear to be like “cockroach loans”…they’ll survive your bankruptcy, nuclear blast, etc. 😉

      1. @PJ Pierre,

        That’s what I thought, they would take a loss on the purchase price if they sell after yields go up, so they would have to write down the value for the period in question.

      2. @Unforgiven,

        maybe orthodox economists should be required to get 10 hours of continuing education credits per year,

        just to get a reminder that there IS a real economy outside their bond age

      3. @PJ Pierre,

        true. Good point. However wouldn’t the higher interest income offset that? Plus isn’t it more than likely they would offload a good portion of their inventory BEFORE the rise in rates in anticipation of the move? Call me cynical but what market doesn’t operate with professionals and amateurs right. 😉

  3. This is interesting notion though: that banks would become resistant to interest rate hike because they are worried that their bond value will decrease.
    Does it mean that – in order for banks to support interest rate hike – the central bank first have to buy all bonds from them?

    But then the banks would also lose the interest rate gains?

    Or are the banks want to profit from interest rate gains, but ALSO to get reimbursed for the bond price fall?

  4. If household financial assets are going down (dissaving) and there is still a trade surplus (is there still?), and business financial assets are not changing much, is there still a need for a government budget deficit? (Or, if the deficit is non-discretionary, is it still even possible to have a budget deficit?)

      1. @roger erickson,

        Until then, you’ll still be perceived as a budget atheist. Gotta attack the semantics or the argument is conceded before debate.

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