IMF would not come out saying that Japan’s bond are going to tumble if it did not have a reason to. Would it? The deflationary spiral is soon going to become a whirlpool that sucks that land of the rising sun into the Pacific ocean. The only question remains of when it will happen and what repercussions will the financial collapse in Japan have on the rest of the world financial system.
Bloomberg. October 6, 2010.
Japanese banks’ holdings of government bonds pose a risk to financial stability should the securities tumble in price, the International Monetary Fund said.
“Banks’ ever-larger holdings of government bonds and the increasing interest-rate risk arising from their extension into longer-dated maturities create a potential risk to financial stability if there were a sudden increase in government bond yields,” the IMF said in its semiannual World Economic Outlook report released yesterday in Washington.
Japanese banks held 294 trillion yen ($3.5 trillion) in government debt as of December, or 43 percent of the total outstanding, Finance Ministry data show. Expanded monetary easing by the Bank of Japan, which this week cut its key overnight lending rate for the first time since 2008 and pledged to buy more government bonds, has helped pushed benchmark 10- year yields to a seven-year low.
“A near-term disruption in the government bond market remains unlikely, but the factors currently supporting the Japanese bond market are expected to gradually erode,” the fund said.
The fund forecast Japan’s gross domestic product to increase 2.8 percent this year and 1.5 percent in 2011, while consumer prices will continue to slide throughout that period. The 2010 growth forecast was 0.4 percentage point higher than the IMF’s prediction in July, while the estimate for 2011 was lowered by 0.3 percentage point.
The fund reiterated that Japan needs to work to pare its debt load and that the burden is constraining the government’s ability to use fiscal policy to stimulate a slowing economy.
“In Japan, decisive fiscal consolidation is unavoidable, given the high level of public debt and anticipated fiscal needs related to the aging population,” the report said. “Japan’s economic prospects remain weak, given lackluster domestic demand and a lack of fiscal room to further boost the economy.”