TOKYO, Dec 16 - Japan is likely to announce this week plans to issue a record volume of bonds in the next fiscal year starting in April despite Prime Minister Junichiro Koizumi's pledge to hold down the country's massive public debt. But most analysts expect any impact on the bond market to be limited since the Ministry of Finance (MOF) has repeatedly said the figures would come within market expectations. "Not many actually thought Koizumi would be able to cut down new bond issuance and revive the economy at the same time so I don't think it makes much difference to the market," said Naoki Suzuki, strategist at Dresdner Kleinwort Wasserstein. The market expects the plan to show total Japanese government bond (JGB) issuance at around 120-123 trillion yen ($1,115 billion-$1,143 billion) for fiscal year 2004/05, up from a record 112 trillion yen set in the MOF's issuance plan for the current fiscal year. Of the total 120-123 trillion yen, new JGB issuance is seen rising to around 38-39 trillion yen in 2004/05 from a record 36.4 trillion yen this year.
Refinancing bonds -- bonds that will be rolled over after their maturity -- would account for the remaining amount. Japan's public-sector debt already totals nearly 700 trillion yen, or about 140 percent of gross domestic product -- the highest ratio in the industrial world.
BALLOONING DEBT
Despite the ballooning debt issuance, most analysts think JGB yields will remain lower than their U.S. or European counterparts as the Bank of Japan is likely to maintain its ultra-loose monetary policy for the next few years. As a key method of flooding the market with liquidity, the BOJ currently buys 1.2 trillion yen of JGBs per month from the market through its outright purchases. "The BOJ is likely to keep its policy for some time and with bank lending still falling, yields will stay low," said Seiji Shiraishi, chief market economist at Daiwa Securities SMBC. As widely expected, the central bank decided on Tuesday to keep its policy unchanged. Jiro Makino, the MOF official in charge of bond issuance and debt management, told in an interview last week that he expected the issuance plan to be in line with market expectations. The yield on the 10-year cash bond <0#JPTSY=JBTC> has stabilised around 1.4 percent, after hitting a record-low of 0.430 percent in July. Benchmark 10-year U.S. Treasuries yield around 4.2 percent. Hit by shortfalls in tax revenues, close to 50 percent of next year's budget is likely to be funded through bond issuances compared with a record high of 44.6 percent this year. MOF officials have said Japan must keep bond issuance under a 50 percent threshold. Most analysts expect the MOF to raise the issuance of bonds in each maturity by 100 billion yen. However, some are worried that it may step up issuance in 20- and 30-year bonds since some market players have said there is room for more super-long bonds.
"Raising super-long bond issuance by more than 100 billion yen could be dangerous since the latest market movements have shown that there is a limit as to how much they can absorb," said Dresdner's Suzuki. From October, the MOF increased the issuance of 20-year bonds to 500 billion yen per month from 800 billion yen every two months. It currently auctions 400 billion yen of 30-year bonds every three months. ($1=107.64 yen)//