|No.42 February 1, 2002|
|The Need for Redefining Japan's Government Debt Management Policy|
As there are increasing concerns over Japan's future economy and the gloomy prospects for financial consoli-dation, the interest rate on Japanese government bonds is now surpassing that on yen-denominated bonds (samurai bonds) issued by Italy or Spain. Indeed, at the end of September 2001 several overseas rating agencies lowered their ratings on Japanese government bonds.
During fiscal 2001, Japan issued a total of 100 trillion in government bonds, including refunding issues. This works out to 2 trillion in bonds offered to the market each week. Including FBs, financing bills, which are shortterm government securities issued to finance the world's highest foreign exchange reserves, government bond issues totaled some 5 trillion every week.
In order to absorb such huge amounts of government debt and ensure smooth financing operations, Japan's government bond market has undergone significant improvements during the past several years. These modifications have centered on improvements in bond issuing procedures, such as the concentration on major benchmark issues and the adoption of a reopen system (real-time integration of issues).
The immediate task facing government debt management policy can be found in reforming the withholding tax system on interest payments in order to further increase the liquidity of the government bond market. In addition, in order to accelerate overall reforms in the capital markets, government debt management policy must be redefined with the recognition that government bonds are the sole financial asset that carries no credit risk. To this end, it is necessary to restrain political interference in determining credit risk and to limit government guarantees to government bonds alone.