Posted by WARREN MOSLER on 29th February 2012
Not to be outdone by the rest of the world’s central bankers:
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.