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Soft Pricing At 30-Year JGB Supply


Japanese MOF sells Y723.4bn 30-Year JGBs:

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By Max Sato
     TOKYO (MNI) - Japan's government and central bank are expected to remain
stuck with elusive targets of balancing the budget and anchoring 2% inflation,
failing to set creditable timeframes and risking a vicious circle of too much
policy stimulus.
     The government has pushed back its oft-delayed target of achieving a
primary fiscal surplus -- in which the government can fully cover policy
expenditures, excluding debt-servicing costs, with its own tax revenues -- by
five years to 2025.
     Critics say that is still too optimistic an outlook as long as the
government keeps trying to bring in higher tax revenues by using additional
fiscal stimulus to boost growth.
     Amid the shrinking working population, Japan's economy has posted a modest
recovery, limiting tax revenue growth.
     This is despite five years of aggressive monetary easing, increased fiscal
spending and structural reform plans under Prime Minister Shinzo Abe, who
returned to power in late 2012.
     Slow progress in fiscal consolidation is also due to Abe's decision to
twice postpone the plan to hike the 8% sales tax to 10%, until October 2019, a
move criticized by opposition leaders as political gambits just before Abe
called a snap election each time.
     The ratio of the primary budget deficit to gross domestic product was 2.9%
in fiscal 2015, when the government managed to halve the deficit as planned, but
it has since failed to make any progress.
     Japan Research Institute economists note that the Abe government's backdoor
spending is worsening the fiscal position, a factor that is making households
worry about the sustainability of public pensions and medical services, and thus
cautious about spending.
     JRI estimates that the Abe administration has spent a total of Y29.6
trillion to finance supplementary budgets, worsening the primary deficit by Y2.5
trillion and its ratio to GDP by 0.4 percentage point, compared to the effects
of slow nominal GDP growth (Y4.3 trillion, 0.8 point) and the delayed sales tax
hike (Y4.1 trillion, 0.7 point).
     "The government has been using supplementary budgets and special accounts
to support economic growth, which has kept it from making progress in fiscal
consolidation," said Kenji Yumoto, chief senior economist at the Japan Research
Institute. "I think the new timeframe -- by 2025 -- will also end up being a
rolling target."
     The slow progress in structural reforms is also weakening fiscal
discipline. Doctors remain a powerful lobby, resisting cuts in medical service
fees, while politicians are cautious about slashing public pension payouts as
seniors remain a big voter group across the ridings.
     Political donations from firms and industry groups rose to Y2.7 billion in
2016, up 3% from the previous year, most of which went to the ruling Liberal
Democratic Party. Along with automakers and banks, the national group
representing medical doctors made a substantial donation.
     "Like in Sweden, Japan should ban political donations from businesses,"
Yumoto said.
     The Bank of Japan is keeping borrowing costs low with a near flat yield
curve and massive asset purchases, keeping the yen relatively weak and
supporting exporter profits while pushing up import costs. It has also helped
limit the government's debt servicing costs.
     The incentive to cut debt is also weak as about 90% of Japan's government
debt is held by domestic investors.
     "I suspect by 2035, the share of foreign investors in JGBs may grow to
match that of domestic investors. If the BOJ tries to exit from easing around
that time, it may become difficult to keep long-term rates from rising sharply,"
Yumoto warned.
--MNI Tokyo Bureau; tel: +81 90-4670-5309; email:

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