Reply #50: Japan Says Sayonara to Bond Market Stability

[54anickel]

http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_pesek&sid=aX9zP5mW5Q3I

Aug. 24 (Bloomberg) -- The rise in Japanese bond yields coincides with signs of recovery in the world's No. 2 economy. It also reflects something alien to traders here: Political turmoil.

Since Japan is effectively a one-party state, its debt market rarely has anything to fear from politics -- other than politicians issuing too much debt, of course. Japan's debt to- gross-domestic-product ratio is about 150 percent, the biggest by far among developed nations.

That hasn't been a huge problem. Japan is adept at maintaining calm in its financial system. The clubby nature of the world's biggest debt market helps keep rates low. For example, roughly 96 percent of Japan's government securities are held domestically, enabling officials to avoid capital flight even as they sell mountains of debt.

Yet Japan's debt-management skills are about to be tested. While the odds may be long, there's a chance that lower house elections on Sept. 11 will end the ruling Liberal Democratic Party's half-century hold on power. That might foster doubts that Japan's fiscal stability will be maintained.

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Unfriendly to Bonds

The fiscal priorities of the Democratic Party of Japan, the closest thing Japan has to a viable opposition party, aren't all that clear. One policy that may cheer bond investors: The party pledges to trim government expenditures, which might lead to less debt outstanding in the future, driving up prices.

Another DPJ pledge calls for cutting in half the amount individuals may deposit at Japan Post, which runs the world's largest savings bank with 350 trillion yen ($3.1 trillion) in assets. That means the biggest holder of Japanese government bonds might buy less in the years ahead, boosting debt yields and sending prices down.

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Remember a couple of weeks ago when the were trying to privatize Japan Post?