At one time, Japanese Government Bonds (JGB) were considered 'the world's safest asset' alongside U.S. Treasury securities, but this stronghold is now wavering.
The ballooning national liability due to lax government financial management has caused investors to begin questioning the reliability of Japanese Government Bonds.
The chilled atmosphere in the Japanese Government Bonds market is starkly evident in recent poor auction results. According to the Nihon Keizai Shimbun on the 29th, the bid-to-cover ratio for a 40-year Japanese ultra-long government bond auction the previous day was just 2.21 times, the lowest level since July of last year.
The bid-to-cover ratio refers to the proportion of the amount investors bid compared to the amount of Government Bonds scheduled for issuance. The lower this ratio, the less popular the bonds are, necessitating higher interest rates to issue the bonds.
Similarly, in the auction for 20-year ultra-long Government Bonds held on the 20th, the competition ratio was 2.5 times, marking the lowest rate in 13 years since August 2012.
As the popularity of Japanese Government Bonds declines, the interest rates on these bonds have naturally soared. The interest rate on 20-year Japanese Government Bonds reached as high as 2.575% earlier this month, a peak not seen in 25 years. The 30-year bond rate temporarily fluctuated above 3.2%, marking an all-time high.
Even during the long-term recession referred to as the 'lost 30 years,' Japanese Government Bonds played a role as a stable source of funding. The Bank of Japan (BOJ) supported this with aggressive bond purchases and ultra-low interest rate policies.
In the past, Japan managed to avoid a financial crisis despite astronomical national liabilities because most of its Government Bonds were absorbed domestically. Japanese financial institutions, including the Bank of Japan, city banks, insurance companies, and pension funds, reliably absorbed these bonds. Sufficient demand acted as a buffer against external shocks, preventing fluctuations in Japanese Government Bond interest rates.
However, in recent years, cracks have begun to appear in this structure. Notably, the proportion of foreign investors in the market for ultra-long Government Bonds with maturities of over 10 years has significantly increased.
According to the Nihon Keizai Shimbun, the proportion of foreign holdings in the ultra-long Government Bonds market, which was around 20% in 2020, has recently approached 50%. Experts analyze that foreign investors, having experienced interest rate hikes, are aggressively entering the Japanese Government Bonds market.
Unlike Japanese investors who have only experienced ultra-low interest rates for decades, these foreign investors pay attention to the possibility of changes in the Bank of Japan's policies. They seek short-term profits from volatility that shakes the previously stable Government Bond interest rates.
The New York Times (NYT), citing experts, noted that 'the increase in the share of foreign investors is a factor that heightens volatility in the Japanese Government Bonds market' and pointed out that 'the perception that Japanese Government Bonds are safe because they are held by Japanese investors no longer holds true.'
Even Japanese financial institutions, which were once the largest buyers of Government Bonds, find it difficult to purchase them again. As the value of Japanese Government Bonds declines, they are already incurring massive evaluation losses on their existing holdings.
According to the Bank of Japan's financial statement report released on the 28th, the scale of evaluation losses indicating the difference between the book value and market price of the Government Bonds held by the Bank of Japan reached 28.6246 trillion yen (approximately 248 trillion won). This is overwhelmingly the highest ever.
In the financial sector, it is evaluated that as the Bank of Japan ends its negative interest rate policy and interest rates begin to rise, the market value of its Government Bonds has plummeted. Other financial institutions, including city banks and insurance companies, are likely in a similar position.
In the past, the Bank of Japan would buy most of the Government Bonds issued by the government using its available funds. This situation now suggests that even this has become difficult.
Prime Minister Shigeru Ishiba recently remarked, 'Japan's financial situation is worse than that of Greece, which experienced a past financial crisis,' further exacerbating uncertainty in the Government Bonds market.
Last year, the ratio of government liability to Japan's gross domestic product (GDP) exceeded 260%, according to estimates by the International Monetary Fund (IMF), placing it overwhelmingly in first place among major advanced economies.
The St. Louis Federal Reserve pointed out in a report last month that the massive government liability issue in Japan is primarily caused by 'increased social security expenditures due to aging and repeated fiscal spending for economic stimulus.'
Experts warn that the rise in Japanese Government Bond interest rates could lead to a decline in the yen's value and a crisis in the Japanese economy.
When Government Bond interest rates rise, the increasing interest burden causes serious difficulties in national financial management. The government may need to reduce public expenditure or raise taxes, but this could dampen economic recovery. Such choices are politically challenging, especially ahead of elections.
The New York Times (NYT) analyzed that 'Japan has become increasingly difficult to raise expenditures or obtain funds at low interest rates,' suggesting that 'this may force painful choices such as reducing public services or increasing taxes.'