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"Our target is not only to sell bonds to foreign buy-and-hold investors, but to get foreign participants to come into the Tokyo markets to play. Japanese investors still have a home-country bias. But if all bonds are held by Japanese, with common expectations and analysis, then this leads to potential illiquidity and volatility" Hiroshi Watanabe |
MoF’s Sumi announces plans for 40-year JGB
OVERSEAS DEBT INVESTOR relations efforts are still new and rather strange for Japan’s key financial policy makers. Hiroshi Watanabe is perhaps not a natural bond salesman. He smiles as he recalls pitching the Japanese recovery to fund managers in New York last year. "One member of the audience came up to me after my speech and said: ‘I totally agree with what you’re saying about the economy.’ I asked him what he was going to do. ‘I’m going to buy Japanese stocks.’"
Watanabe counts any such inflow a good thing for Japan, even if it is not quite the outcome he was hoping for.
Hiroshi Watanabe, Japan’s vice-minister of finance for international affairs, is the man to whom foreign investors in Japanese bonds and equities, participants in the global foreign exchange market and other countries’ policy makers must all look for insights into the development of the Japanese economy, government bond markets, fiscal and tax policy and official attitudes to financial markets and the yen.
Last month, he visited London to speak at Euromoney’s Japan Fixed-Income Forum, continuing the effort to reach out to foreign investors in the JGB market that began in 2005. He remained determinedly upbeat on the Japanese economy, even as global financial markets shuddered following the wrenching decline of the Shanghai index, traders talked about the end of the yen carry trade and the potential for a sharp rise in the Japanese currency – a worry for its exporters – economists questioned whether or not the country’s long battle with deflation had been won, and commentators raised concerns about disagreements between the ministry of finance and the Bank of Japan over interest rate rises.
Watanabe stepped up to the lectern to tell the assembled bond investors: "I want to give you some confidence in the Japanese economic recovery and in future fiscal consolidation. The recovery is now being led by the private sector and private sector investment and helped by household consumption: this is the golden pattern of Japanese growth in the 1970s and 1980s."
But even as he spoke, many in the audience were doubting this rosy view and asking if the Japanese monetary and fiscal authorities might have got their policy mix – of fiscal tightening and still very low but gradually rising interest rates – fundamentally wrong. As Watanabe and Chikahisa Sumi, director of the debt management policy division at the ministry of finance and the man in charge of JGB issuance (see box), continue efforts in the months ahead to woo foreign investors into the JGB market from around Europe, Russia, the Gulf states and North America, they will have their work cut out.
Speaking exclusively to Euromoney after his official remarks, Watanabe acknowledges that if his optimistic expectations for sustained economic recovery are indeed borne out, that’s going to make selling JGBs an even tougher job.
First, however, he wants to dispel the notion that the ministry of finance asked the Bank of Japan to postpone raising interest rates at its January meeting after the central bank had appeared to prepare the ground and lay out the reasons for a rate increase and then failed to deliver it. (It eventually did increase rates from 0.25% to 0.5%, one month later, on the eve of Watanabe’s tour.)
"There is some misunderstanding that the government put pressure on the Bank of Japan not to move because the government does not want to pay higher rates on JGBs," says Watanabe. "That is completely wrong. The prime minister and the minister of finance have made it very clear that monetary policy is solely set by the Bank of Japan and we made no request for postponement." He does not, however, expect international investors to believe that such an intervention is entirely inconceivable. He says: "That kind of request is very symbolic and should be made only very infrequently, maybe once in five years, or even 10."
Forward looking
But he feels within his rights to make some observations on the recent debate over and conduct of monetary policy. "In the last year there has been too much emphasis placed on the linkage between the CPI rate and interest rates. In future I think the interest rate is going to be decided with a more forward-looking approach." That suggests further rises in rates, if the economy chugs along at the officially estimated pace.
That, however, still leaves open the question of how strong the economic recovery really is. The recovery of the Japanese banking system and the restoration to robust health of corporate balance sheets and profits is not in question. But growth has hardly taken off. Although inflation rose to 0.5% in early 2006, allowing the central bank to begin a much needed normalization of interest rate policy and to move away from quantitative easing and zero rates, it had been declining again in the run-up to Watanabe’s visit to London. In the days following, new figures showed it to have fallen back to zero. How confident can Watanabe be that deflation is over?
"It depends on your definition," says Watanabe. "We still have a negative GDP deflator and the weakness in GDP may still reflect a sizeable [output] gap in certain sectors. But what I am saying is that we are no longer worried about the potential for falling back into a bad downward spiral of deflation."
Some economists argue that the Japanese economy has been so distorted by years of deflation and zero interest rates that it might now be operating in ways that defy all conventional wisdom, where interest rate increases might, far from harming the economy, even invigorate it.