In Japan, we went through adjustments in the real estate market a decade earlier than Europe and America. Japan is considered already to have taken the hit; the remaining downside risk seems minimal, whereas for Europe and North America, people still hope that the real estate market wont fall as badly as it did in Japans case. Here we had a full adjustment with the price of land going back to pre-bubble levels. The US and UK dont want to go down as far as Japan did, but investors fear the risk of further decline.
Investors think Japan has limited further downside risk compared to other economies, and hence is a safe haven.EUROWEEK: Given that environment, what is the effect on Japans bond markets, and in particular JGBs?
Only 5% OF JGBs are held by foreigners but they tend to trade more actively than Japanese institutional investors; they account for about 20% of the trading volume. Goldman Sachs Japan or Merrill Lynch Japan, are very active participants.
The JGB market is reasonably linked to the entire global market, but it is a yen denominated market, and its characteristics are very different from the dollar or euro denominated world. Nominally speaking we have very low yield, although in the rest of the world the yield curve has come down quite a lot too; with the US and German 10 years closing to 2%, and Japan now at 1%, the nominal difference between the Japanese and other interest rate environments has narrowed.
Japan is a nation of net savings, and will continue to be so for a while at least. Nobody knows how the ageing population effect will play out, and intuitively it should mean we will have lower net savings down the road, but for the moment we have plenty of savings both household and corporate sector.EUROWEEK: Would you like that 5% ownership to be higher, and is this the sort of environment in which it could happen?
I would like to have a very diversified investor base for Japanese government bonds. Some 45% of JGBs are in the hands of Japanese commercial banks, all of which have similar business models. As a result of this similar way of thinking, there is a chance of herding, with money moving together in the same direction. So we would welcome more foreign ownership of JGBs, but at the same time we do not have a specific target figure.
Sometimes people argue that Japan is different to Greece, because in Japan 95% of JGBs are held by domestic investors. If you look at the Japanese net savings position, we could of course go to 100%. We have no difficulty in funding our own debt with our own savings. So 95% doesnt mean much in itself, as long as we keep our net saver position and continue to be a creditor to the rest of the world. By the same token, if foreigners take 10% of JGBs but the Japanese have a bunch of other foreign assets, thats fine with us.There are arguments that foreigners make the markets more unstable, which I dont buy. Look at the last few disturbances of the JGB market. In 1998 the Trust Fund Bureau of the Japanese Ministry of Finance announced it wouldnt buy as many JGBs as it used to. The way we conveyed the news was not sophisticated enough; we inadvertently surprised the market, in a bad way. That was purely domestic, but we did have a shock. Then there was the VAR shock, which happens when banks are equipped with similar value at risk, risk hedges or risk management software. Therefore a certain movement of the JGB market triggered a sell order to most of the commercial banks. That effect fed into another programme and it escalated.
There is of course a chance that some news that may not surprise the Japanese may surprise foreigners, but we would rather have small tremors than calm and then boom. Thats my view, but its shared by many of my colleagues: we do welcome people who think and act differently from Japanese commercial bankers, including foreigners, households, pension funds, and foreign reserve banks. Some people may not want hedge funds to be active in the market, but I think differently. The arbitrage is important in demonstrating our yield curve is well managed, and that the integrity of our yield curve is strong. We dont want to exclude any type of investors. But we dont want malicious kinds of people; we understand Europeans may have different views on shorting government securities.EUROWEEK: Can you outline your plans for JGB issuance?
We formulate our issuance plan every Christmas for the next fiscal year which starts in April. Our policy is to make it as predictable and transparent as possible. Our issuance plan goes from bills for two, three and six months, to 40 years, as well as inflation-linked and floating or constant maturity types. We consult the investor community and broker-dealers before coming up with these final numbers, and usually when they are finalised and published, they come as no surprise.
We have more issuance in the long end, 30 to 40 years, responding to the markets need, especially the insurance industry: its regulator is increasingly aware of the need to match the duration of their assets and liabilities. Long-dated securities are in high demand.
On these longer dated securities, the government has a comparative advantage over private issuers; it is a long period of time for a corporation. But people tend to live very long these days, and therefore need some certainty, some longer term commitment on a nominal fixed term basis. So in these areas, and on the other very short term side, at either end of the yield curve the need for the government is stronger. And we are willing to respond to this increased demand. That translates to lower costs to taxpayers who pay the interest rates.EUROWEEK: Municipalities have started to do more flexible term issuance, to issue opportunistically. Can you do that with JGBs?
If you are issuing ¥145tr of JGBs, theres limited room to be opportunistic. You can take an opportunistic position and may gain one time, but you have to go back to the market every year for large scale issuance. Instead of taking advantage of situations, we believe that being predictable and transparent will pay off more in the longer run. We issue to finance government operations, and government funding needs may change; a good example is disaster relief, and in such cases we may need to change in mid-year, and we do.
But in such cases we try to float the idea, and once its finalised it usually comes as little surprise. Investors are not a homogenous bunch and we cant fulfill everybodys requests at the same time. But usually we are within expectations. Our aim is to try to convey bad news as early as possible, to keep surprise to a minimum. If anything, the surprise element should be a good one.EUROWEEK: Japanese domestic investors are tremendously loyal to JGBs: as you said, you could cover them 100%. But will that remain the case? Could domestic investors look elsewhere for greater yield?Theoretically we could go to 100% my point was that Japan has national savings sufficient to cover the entire issuance of the government. Would it stay that way indefinitely? Im not sure. We will face the ageing population; the baby boomers born in 1946-47 will become 65 this year and next year. They will start collecting their pensions. And the retirement age is 60 for many Japanese firms, so of course as people retire they live out of their savings and therefore the savings ratio, intuitively, will decline. That is exactly why we have a fiscal consolidation plan of shrinking the primary deficit with the national and local government, to try to achieve a primary balance by 2020. We may have net declining savings but at the same time are trying to shrink government dissaving. Thats our plan.EUROWEEK: Does the strength of the yen have an impact on your borrowing programme?
It is reflected only on the very short end. We see demand across the entire spectrum of the yield curve. Perhaps you should ask foreign investors how far their decisions are currency motivated. Many investors distinguish between the currency play and the rates play. Some may think in terms of their own currency, but among most major players there is a division: currency people are currency people and rates people are rates people.EUROWEEK: When you communicate with foreign investors, do you co-ordinate your marketing with JBIC and DBJ?We have a co-ordinated appearance. Today [at a Euromoney conference in Singapore] I made a keynote speech, Shizuoka Prefecture was presenting, and so was the Japan Housing Finance Agency. This sort of opportunity is beneficial for ourselves and issuers, so it is natural we congregate. EUROWEEK: How do you think international investors see sovereign debt?
I had a four year interval [at the FSA] so this is my return to this scene. I would like to observe the market a bit longer; my knowledge is four years old. The FSA was in touch with the other regulators, and we observed the market from that perspective; but the world from the eyes of a regulator is a bit different from the eyes of an issuer or investor.EUROWEEK: Having returned to the Ministry of Finance, what experience will you bring from the FSA to your new role?
When you perform duties, you do so with your entire personality; it is very difficult to say this part is relevant and this part is not. It was good to be able to look at interest rate swap regulations worldwide. Interest rate swaps are a parallel world: for example for the Japanese yen yield curve, there is a risk free yield curve the JGB yield curve and a swap yield curve. And these fortify each other. If you have a 20 year JGB as a backstop, you can enter into a 20 year swap market knowing you are not too exposed. They are a reality check with each other, and in that sense fortify the integrity of each yield curve. Having a chance to look at this, and knowing the interest rate swap people and the other regulators around the world, is beneficial and allows you to look at JGBs from a different perspective.EUROWEEK: There is a Ministry of Finance man in charge of Japan now. Is it good to have someone in charge who has gone through this financial discipline?
I wouldnt describe Prime Minister Noda as a Ministry of Finance person, but you are right that he has been deputy minister of finance, then minister, and now prime minister. Let me refrain from making any comments on the parliamentary choice. But parliament has nominated Mr Noda as Prime Minister and he has made it very clear that regaining fiscal health is something you cannot delay. So we have a very strong mandate from the prime minister and we, not only in the Ministry of Finance but the entire government, are trying to work with his new direction.EUROWEEK: What would you like him to do to improve Japans fiscal position?Last year the cabinet launched the medium term fiscal framework, and more recently we have had tax and social security reform. We had a temporary departure from this after the Lehman crisis: we had a goal of achieving primary balance by the mid-2010s, but in 2008 we had to stimulate the economy so departed from it. Then in June 2010 there was a cabinet decision to put back this primary balance target. Pretty much every year, except for 2008, we have been on target, and that has been the basis of investor confidence in JGBs. We would like to keep that. Fiscal health is the basis for debt management.
Under this policy target for the primary balance, we can have a solid basis to debt management policy. We would like to continue to talk with the market, and not come up with any surprises. It may not be too sexy, but it will be no-surprise debt management.EUROWEEK: When the third supplementary budget is passed, is there likely to be a knock-on effect in your funding process?We havent decided on the magnitude of the third supplementary budget, but the finance minister has said that his thinking is around ¥10tr. That comes as no surprise to many investors. They foresee a large amount of JGB issuance. But we have room for maneouvre: we have reserves we built up by issuing bonds earlier than they mature. Adjustments can be made not in tens of billions, but at the margin, we have some room. EUROWEEK: Are there any tax issues coming that investors should be aware of?
We have a reasonably broad and easy to follow withholding tax exemption. But if they have any issues, please bring them to our attention. We have been expanding exemptions and lowering procedural barriers.EUROWEEK: Do you have any concluding message to international investors?The JGB is a very liquid instrument and comes in various forms that are easy to fit investors needs. We are willing to make it even more investor friendly. For investors who want some diversification, JGBs come in very handy. We welcome new entrants to the market. w