Japan Risks Yield Jump Undermining BOJ Easing, Fiscal Panel Says

A Japanese government fiscal advisory panel warned that a failure to improve the nation’s finances could trigger a spike in bond yields that makes central bank easing less effective.

Prime Minister Shinzo Abe needs to map out a plan to curb the world’s largest public debt and maintain confidence in the nation’s bonds, the panel, which includes academics and company executives, said in a report released in Tokyo today.

“If the government fails to show concrete success in fiscal reform, the large bond purchases by the Bank of Japan over the next two years could be seen as debt monetization, and this may cause a sharp spike in yields, weakening the effect of monetary easing,” the report said.

Abe and Bank of Japan Governor Haruhiko Kuroda are grappling with reviving the economy without blowing out the nation’s debt burden, projected by the International Monetary Fund to reach 245 percent of gross domestic product this year, the highest in the world. Volatility in stocks and bonds is underscoring the challenge, with the Topix Index falling 3.4 percent today after a one-day 6.9 percent decline last week.

The panel also said Japanese policy makers will need eventually to be alert to the risks associated with exiting from monetary easing. Cutting back on bond purchases could lead to a “spike” in long-term yields, it said.

The panel has sent reports to the Ministry of Finance 10 times since 2001, and last submitted a report in January this year, the ministy's website shows.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

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

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