How Japan borrows $9 trn practically for free

By: |
February 11, 2015 12:02 AM

Low inflation rate and slow growth help

Japan’s outstanding national debt is more than 1 quadrillion yen ($8.4 trillion) and more than twice the size of the economy. That’s way more even than Greece, which is fighting with the rest of Europe for some relief over its debt load.

Yet Japan has the world’s fourth-lowest borrowing costs, even as its borrowings continue to rise. Weird, right?

Here’s why Japan, home to the world’s largest debt burden, can borrow massive amounts of money at little or no cost.

Borrow from domestic investors, mostly banks and consumers

Foreign ownership of Japanese government bonds and treasury bills was 8.9 percent at the end of September, according to central bank data.

That compares with 48 percent of U.S. treasuries held by foreigners, according to data compiled by Bloomberg.

At the end of September, the following three public institutions held at least 46 percent of Japan’s debt.

The central bank: The Bank of Japan has bought government bonds since 2001 in an attempt to stimulate the economy and beat deflation, with its holdings doubling since the current monetary easing policy started in April 2013. At the end of September it had 23 percent of government bonds and treasury bills. And this has continued to rise.

The post office: Japan Post Holdings held 167 trillion yen of the government’s debt, about 16 percent of the total and the most after the central bank. About 70 percent was at the Japan Post Bank, and the rest was at Japan Post Insurance.

The pension system: Public pension funds held 62 trillion yen of the government’s securities, more than 6 percent of the total. Most of these were at the Government Pension Investment Fund, the world’s biggest pension manager. Almost half of its 130.9 trillion yen in assets were in domestic bonds at the end of September, with the GPIF aiming to cut this to 35 percent.

Have a low rate of inflation and slow growth

When growth and inflation are low, this encourages investors to purchases government bonds, which guarantee a risk-free return.

Japan’s economy grew an average of 0.8 percent in the 10 years through 2013 and probably expanded 0.2 percent last year after a sales tax hike pushed it into recession mid-year. By comparison, the US grew an average 1.6 percent in the 10 years through 2014.

Japan’s consumer prices excluding fresh food rose to 0.5% in December from a year earlier, once you strip out the effect of the sales-tax rise. In the five years through the end of 2014, price were little changed, rising an average 0.04%.

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