Poor demand for government-issued 20-year bonds in Japan on Tuesday (May 20) has heightened fears in debt-heavy Western governments, including the UK and US, that a financial crunch could be on its way. The low demand has sent shockwaves through the debt markets, pushing long-term Japanese yields – the government’s cost of borrowing – to the highest in decades.
The Asian country’s prime minister, Shigeru Ishiba, warned parliament on Monday that his government’s position was “worse than Greece”. This comes as his minority government faces elections in July. On Tuesday, the government tried to sell one trillion yen (£5.2 billion) of March 2045 bonds at an auction. However, the average bid-to-cover ratio, which measures investor appetite, dropped to 2.5, the lowest since 2012.
In response, investors pushed the Japanese government’s 20-year yield to the highest this century, while the 30-year yield hit a new record high. The benchmark 10-year yield also surged.
In a world of increased volatility and uncertainty, there is a real threat that bond market investors could lose faith in debt-dependent governments like the UK, The Telegraph argued.
“The pressure on both Japanese and US bonds this week is a sign bond traders are willing to punish high-debt nations with large deficits,” Kathleen Brooks, analyst at XTB told the site.
“This is an issue that has hurt the UK in the past, it is weighing on the US right now, and Japan is also coming under the spotlight.”
The ever-increasing cost of borrowing has led Japanese PM Ishiba to say on Tuesday: “The government is not in a position to comment on interest rates, but the reality is we are facing a world with them. Our country’s fiscal situation is undoubtedly extremely poor, worse than Greece’s”.
The International Monetary Fund (IMF) has put Japan’s debt-to-GDP ratio at 235%, far higher than Greece’s 142%.
Due to the global recession in 2008, high public debt and a lack of fiscal discipline, Greece was hit particularly hard by the Eurozone crisis. The country’s inability to address its debt problems, coupled with a lack of monetary policy flexibility within the Eurozone, resulted in a loss of confidence in the Greek economy.
Japan’s finance Minister, Katsunobu Kato, painted an even bleaker picture, warning of the damage that could be caused by a loss of market trust in the country’s finances, which, he said, “could lead to sharp rises in interest rates, a weak yen and excessive inflation that would have a severe impact on the economy”.
Next month, the Bank of Japan (BoJ) will have to decide whether to stay on the current course, which would leave it buying an eyewatering 2.9 trillion yen (£15 billion) every month. Even sooner, however, is the auction of 40-year bonds, set to take place next week, which has already got investors nervous.
