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Japan Must Overhaul Tax to Avoid Bond Rout, Bank Lobby Says

Mizuho Financial CEO Yasuhiro Satoa
Yasuhiro Sato, president and chief executive officer of Mizuho Financial Group Inc. Photographer: Junko Kimura/Bloomberg

Japan must quickly overhaul the tax system to prevent government borrowing costs from spiraling in the next decade, the new head of the nation’s bank lobby said.

“The risk of a tumble in government bond prices would increase if taxation and social security reform are left unsolved for years,” said Yasuhiro Sato, whose tenure as chairman of the Japanese Bankers Association began yesterday. “The country’s financial assets are dwindling with the aging population dipping into savings.”

Japanese banks hold a record amount of the nation’s bonds, prompting central bank Governor Masaaki Shirakawa to warn in February that lenders risk incurring trillions of yen in losses if yields rise. Prime Minister Yoshihiko Noda faces opposition to his plan to double the sales tax by 2015 to pay for swelling welfare costs and contain the world’s biggest public debt.

“Any delays to the reform that’s being debated may raise concern that bonds may be unable to be absorbed domestically in the long run, say, in 2022,” Sato, president of Mizuho Financial Group Inc., said in an interview last month. “But there are no signs of a JGB price plunge in the near term.”

Japan’s benchmark bond yields have remained below 1.1 percent this year. The yield on 10-year notes rose 2.5 basis points to 1.01 percent at 1:52 p.m. in Tokyo. The cost to insure Japan’s debt against nonpayment has been falling, with CMA data showing five-year credit default swaps declined to 99.8 basis points on March 30 from a record 154.8 on Oct. 4, indicating perceptions of creditworthiness are improving.

Hoarding Cash

Shirakawa said in February that a 1 percentage-point increase in benchmark yields would cause losses of about 3.5 trillion yen ($43 billion) on notes held by major banks. With households and companies hoarding cash rather than borrowing, lenders have been buying bonds, holding a record 167.8 trillion of sovereign debt in February, according to central bank data.

The International Monetary Fund dispatched a mission to Tokyo last month as part of a regular review it’s conducting this year into the stability of Japan’s financial sector. While the IMF’s Financial Sector Assessment Program contains a stress test for banks, brokerages and insurers, it’s unclear whether it will examine risks from their government bond holdings.

“Japan’s financial system is strong and stable,” Sato said. “It’s hard to imagine that the IMF would make any kinds of requirements for Japan” based on any examination of bonds held by financial institutions, he said.

Bond Profits

The nation’s three biggest lenders -- Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Sato’s Mizuho -- earned a combined 231 billion yen from trading bonds and other securities in the quarter ended December, almost double from a year earlier, according to Bloomberg calculations based on their latest earnings figures.

Japan’s government bond sales have largely been absorbed by the domestic market, with about 92 percent of the debt owned by investors at home, central bank data show. The capacity of households to fund public spending may decline in coming years as the growing ranks of pensioners withdraw assets.

Households had 1,483 trillion yen of financial assets at the end of December, down 0.3 percent from a year earlier, according to the Bank of Japan. Government borrowings will climb to 1,086 trillion yen in the year ending March 2013, the Finance Ministry forecast in January.

Prime Minister Noda is seeking parliament’s approval of his tax bill in the current Diet session, while opposition Liberal Democratic Party leader Sadakazu Tanigaki has suggested elections should be called first. Noda’s Cabinet on March 30 approved the proposal to raise the sales levy to 8 percent in April 2014 and 10 percent in October 2015.

“Japanese banks conduct their own simulations and assessments of various risks such as those arising from bonds and stocks,” Sato said. “We are now far from the situation where a bomb may explode in the near future.”

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