Japan Urges U.S. to End Deadlock as Aso Keeps Calm on Treasuries

Photographer: Andrew Harrer/Bloomberg

Japanese Finance Minister Taro Aso attends the International Monetary Fund and World Bank Group Annual Meetings in Washington, D.C., on Oct. 12, 2013. Aso called the U.S. government standoff a “big issue” for Japan. Close

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Photographer: Andrew Harrer/Bloomberg

Japanese Finance Minister Taro Aso attends the International Monetary Fund and World Bank Group Annual Meetings in Washington, D.C., on Oct. 12, 2013. Aso called the U.S. government standoff a “big issue” for Japan.

Japanese Finance Minister Taro Aso said it was up to the U.S. to resolve its debt impasse, not for Japan to fret over its investment in Treasuries, as a deadlock in Washington threatens to trigger a U.S. default.

“This isn’t a problem that can somehow be resolved by us making a lot of noise,” Aso said in an interview on Friday in Washington with Bloomberg TV. “There’s no other way than for the U.S. government itself and the U.S. Congress to make an effort to sort it out. It’s not a matter of what we should do,” Aso, 73, said when asked if Japan needed to look at its asset allocation in U.S. Treasuries.

With the U.S. set to run out of room to borrow more unless Congress increases the debt ceiling by Oct. 17, Senate leaders began negotiations to avert a U.S. default after talks between the White House and House Republicans hit an impasse. Group of 20 central bankers and finance ministers called for “urgent action” to break the deadlock after the International Monetary Fund warned a failure by the U.S. to meet its debt obligations would “seriously damage” the global economy.

Aso, who said last week that the Japanese government must consider the impact of a default on its bond holdings, called the U.S. standoff a “big issue” for Japan. “We hope very much it will be sorted out by Oct. 17,” Aso said.

China Watching

Japan held $1.14 trillion worth of U.S. Treasuries at the end of July, the second-largest foreign holder, according to data from the Treasury Department. China, with $1.28 trillion worth, is the largest foreign creditor to the U.S. while the Federal Reserve holds the most Treasuries, the data show.

China is paying great attention to the U.S. debt ceiling issue, state-run Xinhua News cited Premier Li Keqiang as saying last week.

The U.S. fiscal impasse is a good time for a “befuddled world to start considering building a de-Americanized world,” including a new international reserve currency to replace the dollar, China’s official Xinhua News Agency said in an Oct. 12 English-language commentary written by Liu Chang.

If the U.S. fails to raise the borrowing cap by Oct. 17, the government will have $30 billion plus incoming revenue to pay its bills. It would start missing scheduled payments, including benefits, salaries and interest, between Oct. 22 and Oct. 31, according to the Congressional Budget Office.

Rates on Treasury bills due on Nov. 29 rose 12 basis points, or 0.12 percentage point, to 0.16 percent last week, according to Bloomberg Bond Trader prices. They were negative as recently as Sept. 30. Yields on benchmark Treasury 10-year notes rose four basis points on the week to 2.69 percent.

Democratic senators on Oct. 12 warned of potential stock market declines Oct. 14 if Congress can’t reach an agreement.

External Risks

External rather than domestic challenges pose the biggest risks to Japan’s economy, Aso said, citing the Oct. 17 deadline and China, where he said “there are many difficulties now,” without elaborating.

“Domestically, with the Olympics coming, sentiment seems to be picking up,” Aso said. “So consumer spending will tend to increase, and, in that sense, we will have to be constantly mindful of foreign factors rather than domestic ones.”

Japan’s economy grew for a third straight quarter in the three months through June, as Prime Minister Shinzo Abe aims to end 15 years of deflation and revive the world’s third-biggest economy.

Changes Promised

Having pushed through fiscal steps -- including 5 trillion yen ($51 billion) in stimulus to counter a blow from a sales-tax increase in April -- and unprecedented monetary easing that has weakened the yen and boosted exporters’ profits, the challenge for Abe is to overcome political opposition and implement sweeping structural changes he promises to jump-start private-sector growth.

Encouraging businesses to start distributing their rising profits and near-record cash by boosting wages and investment will be key to sustaining the rebound. Without pay increases, households will be hit by both higher taxes and living costs -- as energy bills climb after the yen slid about 21 percent the past year against the dollar.

That so-called “third arrow” of Abenomics -- an overhaul of regulations, tax and other policies -- is the most critical, Aso said.

Japan will lift a ban on outsourcing management of foreign exchange reserves to private industry to improve efficiency, the Nikkei newspaper said today, without attribution. The government will let trust banks and private funds manage part of its $1.27 trillion reserves, while Treasuries and other stable assets will remain the core investments, Nikkei said.

‘Widespread Skepticism’

Japan’s plan to raise the sales tax to 8 percent in April from 5 percent while boosting fiscal stimulus met “widespread skepticism” at the G-20 meeting, according to Chinese Deputy Finance Minister Zhu Guangyao.

It would be dangerous for Japan to rely on monetary policy alone to boost growth, as it would be easy for the central bank to be seen as financing the government’s deficits, said Naoyuki Shinohara, deputy managing director at the International Monetary Fund.

Inflation expectations in Japan haven’t rebounded as much as the government has hoped, Shinohara said in an interview in Washington on Oct. 11. The more stimulus that the Bank of Japan applies, the harder it gets to eventually normalize policy and the greater the risk of accumulating imbalances in financial markets, which are challenges that the U.S. Federal Reserve is already facing, he said.

Everyone knows the Fed must one day return the U.S. money supply to “normal,” Aso said. Unless the timing and speed is considered carefully, any tapering could cause large problems, particularly in emerging markets, Aso said, calling for close communication between the Fed and the BOJ to prevent problems from spilling over to the global economy.

To contact the reporters on this story: Sara Eisen in New York at seisen2@bloomberg.net; Aki Ito in San Francisco at aito16@bloomberg.net

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

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