31 March 2013, 19:37

Japan debt 'not sustainable' – Bank of Japan

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Bank of Japan
Bank of Japan

Haruhiko Kuroda, the governor of Japan’s central bank, admitted that the government’s debt is “not sustainable”. Contradicting the optimism of Prime Minister Shinzo Abe, Kuroda told the parliament that a loss of confidence in state finances will have negative consequences for the country’s economy.

So far, the economic strategy of Shinzo Abe has proved to be unsuccessful. FT reports that Morgan Stanley MUFG Securities described the stimulus program launched by the Japanese government as “print and spend”. The increase of the government’s debt is a direct consequence of Abe’s program and the debt to GDP ratio has become abnormally high. Haruhiko Kuroda warned the members of the parliament that the stability of the government bond market should not be taken for granted. A rise in yields of the Japanese government bonds could be devastating to the country’s economy, making the government unable to finance its expenses. Yasunari Ueno, chief market economist at Mizuho Securities in Tokyo, told FT that “a ‘bad’ rise in yields, driven by fears of a loss of fiscal discipline rather than expectations of growth, could ultimately strangle the economy”.

Japanese government has become a target for internal and external criticism for its stimulus program which relies on perpetually low rates and continuous support of the foreign and domestic bondholders. The governor of Japan’s central bank pointed out that such policy is dangerous and can hurt the economy. At the same time, Kuroda is not trying to stop the monetary easing programs launched by his predecessors. He promised the Parliament that the maturity of bond purchases will be extended, proving more room for further “print and spend” stimulus. Reuters reports that the governor of Japan’s central bank believes that the time for stopping the stimulus policies hasn’t come. “As a central bank, we have to mindful of the risks associated with different policies, but it is too early to talk about exit strategy now”, he told the Japanese parliament.

The behavior of the Japanese officials is self-contradictory. Haruhiko Kuroda warns that the stimulus policy is very dangerous but at the same time he is not going to look for an exit strategy. Such contradictions make the policy of the Japanese monetary authority completely unpredictable and that could become a major issue affecting the bondholders’ trust in the Japanese economy.

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