Not to be outdone by the rest of the world’s central bankers:

Japan Not Immune To Debt Crisis, BOJ Kamezaki Says

By Tatsuo Ito

February 28 (DJ) — A Bank of Japan policy board member said Wednesday that Japan is not immune to a Europe-style debt crisis as confidence in the country’s government bonds could quickly weaken if concerns over its fiscal state mount.

The European crisis “is not a fire on the other side of the river,” Hidetoshi Kamezaki told business leaders in Fukuoka, western Japan, using an phrase frequently employed by Japanese policy makers over the last few months to warn that a Europe-style crisis could spread to Japanese shores.

“It’s not appropriate to assume there won’t be concerns about JGBs,” in the future just because the bonds continue to be smoothly bought in the market, Kamezaki said, adding that confidence in government debt can change unexpectedly.

Japan’s fiscal conditions are the worst among developed nations, with a gross public debt of around 200% of its annual economic output, but the country has so far avoided a Greece-style crisis as domestic investors hold almost all of its debt.

An ample and steady flow of funds from overseas in the form of a surplus in its current account — which includes trade — has financed the debt, but recent data suggest that could be changing.

Japan recorded a trade deficit for all of last year, meaning that if the trend were to continue, the country may need to rely on foreign capital to finance its debt, like many of the European countries being hit by the debt crisis.

Kamezaki played down the possibility of Japan’s current account moving into the red, saying flows of income stemming from the country’s external assets worth Y250 trillion could be maintained.

“The trend of Japan’s current account surplus will not change for a while unless the trade deficit grows rapidly,” Kamezaki said.

At around 0030 GMT, the benchmark 10-year government bond yield was at 0.965%.

Kamezaki also said the central bank should keep actively implementing policies to ensure the Japanese economy can overcome deflation and achieve sustainable growth with price stability.

“The BOJ should continue to pro-actively implement policies needed to achieve these purposes,” Kamezaki said.

The BOJ on Feb. 14 surprised the markets by boosting the size of its asset purchase program–the main tool for credit easing amid near zero interest rates–to Y65 trillion from Y55 trillion by increasing purchases of Japanese government bonds. It also clarified a near-term inflation goal for overcoming deflation.

The financial markets have reacted positively to the BOJ’s actions, with the dollar briefly hitting a nine-month high of Y81.66 on Monday and the stock market rallying.

14 Responses

  1. it is quite suspicious that all central bankers highlight the same issue, while they surely must realize that reality is different. They manage the very institutions which workings they misrepresent.

    1. @Gary,
      I agree, It appears that they are not apolitical, but rather use demagogy for what ever political goals they might have.Prevailing parties must have heavy influence on CBers.

  2. Spreading fear must be a happy past time for some. I don’t get why a board member would be doing this when he knows or should know its not going to happen.

  3. It seems to me that while politicians (and academic board members) are still caught up in the whole “debt issue”, the main central bankers (especially in Japan and US) through their recent experiences, get it or are starting to get it. As Warren has mentioned, there are people at these institutions who understand how money market operations work. I guess it is just too big a step for the world for the central bankers to come out and say it – to turn modern day thinking on its head.

  4. Kamezaki say that “confidence in government debt can change unexpectedly”. He has obviously attended the Rogoff – Reinhart – Nial Ferguson school of economic illiteracy.

    If creditors of a monetarily sovereign country start demanding a much higher rate of interest, it matters not one iota. The country can just stop borrowing, and go for a combination of raised taxes and money printing. As long as the TOTAL of those two is right, government gets the money it needs. As to the inflationary impact, adjusting the ratio “raised taxes:money pringinting” gives you whatever level of stimulus or inflationary impact you like.

    1. i say it this way.

      the govt is best thought of as spending first and then either ‘collecting’ taxes or ‘borrowing’

      specifically, spending adds to member bank reserve account balances
      taxing subtracts from those balances.

      and ‘borrowing’ is the shift of dollars from reserve accounts to ‘securities accounts’ at the Fed they call ‘tsy secs’

      the govt shouldn’t care an iota whether holders of reserve balances shift to tsy securities or not.

  5. Except that if holders of tsy securities shift to cash (e.g. as a result of QE) then those holders are cash rich, and they are liable to do something with the cash. They are unlikely to blow much of it on consumer goods, but seeking alternative investments is a liklihood. E.g. they might go for property or commodities, and the effect there is stimulatory and possibly inflationary. And any such inflationary effect may need to be countered by increased tax, which is why I mentioned tax above.

    Rodger Mitchell thinks the inflationary effect would not occur. Personally I like at least MENTIONING the possible necessity of a tax increase. That is so as to shut up the economic illiterates who keep saying “QE = money printing, and we’ll have hyperinflation by this time tomorrow.”

    1. @Ralph Musgrave,

      “Except that if holders of tsy securities shift to cash (e.g. as a result of QE) then those holders are cash rich, and they are liable to do something with the cash.”

      They’d have been cash rich without QE. They were selling anyway. At best they have a bit more cash perhaps a bit earlier than they were expecting.

      It’s really the buyers that were outbid by QE money and their forced altered behaviour that we should be focussing on. Since they were looking to save I doubt they changed their mind and bought a yacht.

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