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BOJ’s Shirakawa Says Japan Needs to Sustain Debt Credibility

Bank of Japan Governor Masaaki Shirakawa said the government needs to work to maintain investor trust in its debt, two weeks after Standard & Poor’s downgraded the nation’s sovereign credit rating.

Japan should make “every effort to maintain the confidence shown by markets while working on mid- to long-term fiscal consolidation,” Shirakawa said at a speech at the Foreign Correspondents’ Club of Japan in Tokyo today. While investor appetite for government debt has contained borrowing costs, “no country can continue to run fiscal deficits forever,” he said.

S&P last month cut Japan’s debt rating to AA-, the fourth- highest level, saying it expects the country’s government debt ratios to continue to rise. The nation’s long-term yields, around 1.3 percent, have helped the government finance a debt burden approaching 200 percent of gross domestic product, the largest in the industrialized world.

“Governor Shirakawa has repeated his warnings against Japan’s ballooning public debt, and his comments on the issue is becoming more clear after Japan’s rating was actually cut,” said Tatsushi Shikano, a senior economist at Mitsubishi UFJ Morgan Stanley Co. in Tokyo.

Shirakawa said spurring inflation alone won’t be able to alleviate Japan’s debt, which is in “very bad shape.” While price increases could increase tax receipts, it will also add to social security and other government spending burdens, he said.

Bond Pledge

S&P’s downgrade followed forecasts by the government indicating Prime Minister Naoto Kan may need to abandon his pledge to contain new bond sales due to a lack of revenue. The central bank has lowered its benchmark interest rate close to zero and purchased assets ranging from corporate bonds to exchange-traded funds to spur growth and help Japan overcome deflation.

Hidetoshi Kamezaki, a BOJ board member, last week said financial markets have reacted calmly to the downgrade of Japan’s debt. Even so, it’s necessary to bear in mind the risk that financial markets could “suddenly” turn to be volatile on concerns about sovereign debt even if there is no change in the state of the economy or the nation’s finances, Kamezaki added.

The yield on benchmark 10-year government debt reached 1.3 percent, the highest in almost nine months, after an unexpected drop in the U.S. jobless rate drove up Treasury yields. Japan’s bond yield have been underpinned by low interest rates and domestic savings that have helped fuel government spending.

Debt Projections

Japan’s Finance Ministry said the nation’s public debt will probably swell to 997.7 trillion yen in the year starting April. It projects debt sales may surpass 50 trillion yen in the period starting April 2013 amid a growing revenue shortfall.

The governor also said the central bank’s purchases of government debt aren’t intended to finance public spending. The central bank purchases 1.8 trillion yen of government bonds every month as well as in its asset purchase program.

“The BOJ wants to avoid giving the impression that it is financing debt issuance with its bond purchases,” Shikano said.

Shirakawa also said the nation’s economy is recovering. Gross domestic product growth will probably accelerate each quarter of 2011 after contracting at a 1.9 percent annual rate in the three months ended December, according to surveys of economists by Bloomberg News. The Cabinet Office is scheduled to release the fourth quarter GDP report on Feb. 14.

“Recent data suggest that Japan’s economy looks like it is about to emerge from that pause,” Shirakawa said. “As far as short-term economic and financial developments are concerned, Japan’s situation is by no means worse than that of other advanced economies.”

To contact the reporters responsible for this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net; Aki Ito in Tokyo at aito16@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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