NRI Papers
No.42   February 1, 2002
  The Need for Redefining Japan's Government Debt Management Policy  
Toshiki TOMITA
        Japan has set a disgraceful record in accumulating the world‚fs highest outstanding balance of government bonds. In proportion to the nation's economic scale as well, Japan's public debt in central and local govern-ment bonds stands at the worst level not only among the G7 economies, but also among all 25 member states of the OECD. At the same time, interest rates on 10-year government bonds continue to hover near a low of 1 percent to 1.5 percent per annum. This historical record can be attributed to the fact that expectations for inflation have now cooled off.
    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 yen100 trillion in government bonds, including refunding issues. This works out to yen2 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 yen5 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.
Contents
I Essential Features of Government Bonds
1 The Polestar of Financial Markets
2 Three Goals and Five Principles of US Debt Management Policy
3 Monetary Policy and Government Debt Management Policy
4 Government Bond Structure with the Optimum Balance of Maturities
II Government Bond Issues and Monetary Policy in Japan
1 Drastic Increases in Government Bond Issues
2 Zero Interest Rate Monetary Policy and Government Debt Management Policy
3 Role of Time-Axis Policy
III Improved Mechanisms for Government Bond Issuance
1 JGB Liquidity is Not High
2 Efficiency of Government Bond Markets
3 Rapid Expansion of Short-Term Bond Markets
IV Distorted Ownership of Japanese Government Bonds
1 Concentration Among Private Banks and Public Agencies
2 Limited Non-Resident Ownership of JGBs
V Enhancing Liquidity in Government Bond Markets
1 Factors Preventing Improved Liquidity in JGB Markets
2 Eliminating Withholding Tax on Interest
3 Reforms in Government Bond Custody and Settlement Systems
VI Important Considerations Regarding Credit Risk
1 Why do Japanese Households Prefer Bank and Postal Savings Deposits?
2 Credit Risk Intervention Should be Limited

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