Tokyo: Japan is in a "bond bubble" that may burst in a few years if the government doesn't increase taxes to cut its debt burden, said Masayuki Matsushima, a former executive director at the Bank of Japan.
Any collapse of the bubble would boost long-term borrowing costs and lengthen the time it takes for the government to fix its finances, Matsushima, currently the Japan chairman of Credit Suisse Group AG in Tokyo, said yesterday.
Standard & Poor's downgraded Japan's sovereign debt rating to AA- last week, saying that Prime Minister Naoto Kan's administration "lacks a coherent strategy" to tackle the country's debt, the largest in the world. While Japan's borrowing costs are among the lowest in the industrialized world, the benchmark 10-year bond yield has climbed 7 basis points this week amid signs of improvements in the global economy.
"The government has reached the stage where it can consider increasing the consumption tax rate, but if it can't come up with a plan to implement the increase, there's a possibility the government-bond bubble will burst," he said.
The 10-year Japanese bond yield rose 4.5 basis points to 1.285 per cent in Tokyo yesterday.
Mitsubishi UFJ Financial Group Inc., Japan's biggest publicly traded bank, posted a profit from the sale of bond holdings of 43.4 billion yen in the October-December quarter, an increase of 14 per cent. At Sumitomo Mitsui Financial Group Inc., Japan's second-largest bank by market value, bond sale profit declined to 9.55 billion yen from 52.98 billion yen a year earlier, according to calculations by Bloomberg News.
Matsushima, 65, said bond yields didn't react much to the S&P decision because domestic investors hold more than 90 per cent of Japanese government debt.