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Utsumi Says ‘Quicksand’ of BOJ Bond Purchases Adds Risks

Japan Credit Rating Agency President Makoto Utsumi
Makoto Utsumi, president and chief executive officer of Japan Credit Rating Agency Ltd. Photographer: Junko Kimura/Bloomberg

The Bank of Japan is locked into purchasing more government bonds and may contribute to a loosening of fiscal discipline in the world’s largest public debt market, a former top Japanese currency official said.

“Since they have come this far, if the BOJ stops purchasing bonds, there will be a fall in bond prices and huge valuation losses” for banks, said Makoto Utsumi, former vice finance minister for international affairs and now president of Japan Credit Rating Agency Ltd. “They’re damned if they do and they’re damned if they don’t,” he said in an interview in Tokyo on March 1.

The central bank last month boosted bond purchases through its asset fund by 10 trillion yen ($123 billion) as part of easing measures to counter deflation and spur growth. That means the BOJ is poised to buy a record 25 percent of bonds sold by the government in the fiscal year starting in April.

In the long term, the nation risks a loss of fiscal discipline, said Utsumi, 77, who led the nation’s currency policy from 1989 to 1991. “It looks to me like the BOJ is increasingly stepping into quicksand.”

Yields on benchmark 10-year bonds traded unchanged at 0.99 percent at 1:37 p.m. in Tokyo.

Monetary Policy

In parliamentary testimony on March 2, BOJ Governor Masaaki Shirakawa renewed his commitment to keep monetary policies accommodative until inflation of 1 percent is in sight, aiming to end more than a decade of deflation. The BOJ buys 1.8 trillion yen of government bonds a month separate from its purchases using its asset fund.

Japan’s government is aiming to support an economy that has contracted for three of the past four years and is constrained by falling prices, weakness in export demand and strength in the yen. Signs of a revival this quarter have included gains in retail sales and industrial production and Toyota Motor Corp. raising its profit forecast.

At the same time as it seeks to spur growth, the government needs to limit the increase in a public debt already about twice the size of growth domestic product. Prime Minister Yoshihiko Noda is trying to secure lawmakers’ support for doubling the nation’s sales tax to increase revenue.

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