Andy Mukherjee writes for Reuters. Japanese lenders’ outsized government bond holdings have Prime Minister Shinzo Abe in a chokehold. Unless banks shed the load now, they might try to dump the debt when the Bank of Japan stops printing money and causes bond prices to fall. A stampede could rattle the financial system and dent Abe’s anti-deflation campaign.
Deposit-taking institutions have trimmed their portfolio of Japanese government bonds (JGBs) by 9 percent over the past year, helped by the BOJ’s aggressive bond-buying programme. But they still carry 288 trillion yen ($2.8 trillion) of JGBs, equivalent to 60 percent of GDP.
There is a worrying amount of government debt still to come. The stock of JGBs would zoom to just over 925 trillion yen by 2017, from an estimated 860 trillion yen at the end of 2014, assuming 2.5 percent annual growth in the debt pile. If the Government Pension Investment Fund starts chasing riskier assets like equities to bolster returns, another 10-15 trillion yen of JGBs may need to find alternative buyers by 2017.
That brings the oversupply to 80 trillion yen. On past trends, other non-bank investors and foreigners can pick up 35 trillion yen of the slack, leaving 45 trillion yen of JGBs looking for a home. The BOJ can’t keep buying 50 trillion yen of JGBs a year, and may turn seller once inflation picks up.