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Japan to Sell 7.8 Trillion Yen More Bonds for Stimulus

Prime Minister Shinzo Abe
Prime Minister Shinzo Abe wants to spur growth to bring the economy out of recession and end more than a decade of deflation. Photographer: Haruyoshi Yamaguchi/Bloomberg

Japan will sell an additional 7.8 trillion yen ($88 billion) in bonds this fiscal year to help pay for economic stimulus, the government said, slowing its attempt to curb the world’s largest debt burden.

The finance ministry said today in Tokyo it will issue 5.5 trillion yen in construction bonds, while reducing deficit-financing bonds by 299 billion yen, bringing new financing debt sales for the year through March to 49.5 trillion yen. It will also sell 2.6 trillion yen in so-called bridge bonds to finance pension payments.

Prime Minister Shinzo Abe wants to spur growth to bring the economy out of recession and end more than a decade of deflation. The extra bond issuance may heighten concern that the government’s commitment to fiscal reform is slipping, adding to the risk that a public debt more than twice the size of the economy may trigger a surge in bond yields.

“Abe’s stance on fiscal consolidation is still unclear, whether he wants to pursue more spending combined with bond sales or if it’s just limited to this latest supplementary budget,” said Takahiro Sekido, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd and a former Bank of Japan official.

The benchmark 10-year bond yield fell four basis points to 0.77 percent as of 5:48 p.m. today in Tokyo, the lowest level this year. The securities yielded 105 basis points less than similar maturity U.S Treasuries, compared with 92 basis points a year earlier.

Japan’s shorter-term bonds rallied last week, while longer-term debt that is more sensitive to expectations for inflation declined, widening the yield spread between the 30-year and 5-year securities to the most since March 2010.

Extra Budget

“Our top policy priority is to escape recession and that is the reason we have decided to issue more bonds,” Finance Minister Taro Aso told reporters today after the ministry said it will exceed a 44 trillion-yen cap on new financing bond issuance in this fiscal year.

The Cabinet today approved a 13.1 trillion yen extra budget to help pay for the economic stimulus plan unveiled last week. On top of revenues from additional bond sales, the government will use 2 trillion yen in excess reserves from the fiscal 2011 budget and 2.1 trillion yen in unused funds from this fiscal year, the ministry said.

With the extra spending, total government expenditure for this fiscal year will exceed 100 trillion yen. Total debt issuance for the current fiscal year will reach 180.5 trillion yen, according to the ministry.

Japan’s government debt probably climbed to 237 percent of annual economic output last year, the most in the world, according to International Monetary Fund estimates.

Increased Issuance

The government will sell 2.7 trillion yen of 5-year bonds per month in February and March, an increase of 200 billion yen each month, the finance ministry said. It will also sell 2.4 trillion yen in 10-year bonds in the two months, an increase of 100 billion yen each month. It will cancel a planned annual sale of six-month notes worth 900 billion yen.

With the supplementary budget, the government will rely on borrowing for 49.2 percent of this fiscal year’s revenue, excluding bridging bonds, the second highest share on record.

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