(For global coverage of soaring govt debt click [ID:nDEBT])
* Fitch threatens ratings review over bond issuance
* Investors fret over Japan's bulging public debt
* Finance minister acknowledges concerns over budget
* Voters getting more worried about fiscal discipline
* Strategist: Markets need more reassurance
(Recasts, adds analyst comment)
By Stanley White
TOKYO, Nov 10 Fitch Ratings warned Japan on
Tuesday to keep to its borrowing target or risk a credit rating
downgrade as the finance minister acknowledged the problem and
tried to reassure rattled investors by saying spending had to be
Japanese sovereign credit default swaps spreads have nearly
doubled in the past week as investors fretted that the government
faces a funding crunch over its ballooning public debt, which the
International Monetary Fund says will spiral to 227 percent of
gross domestic product next year, by far the worst in the G7.
The fiscal pain is causing public concern in Japan and is
building into a major test of the new government, which is trying
to reconcile a slump in revenues owing to the global downturn
with ambitious spending plans.
The government has said it plans to borrow 44 trillion yen
($490 billion) in the 2010/11 fiscal year starting next April,
which would be on top of expected record issuance this fiscal
year of more than 50 trillion yen.
But Fitch Ratings said it's hard to see how the 2010/11 goal
will be achieved and borrowing much more than 44 trillion yen
would spark a ratings review. [ID:nT286946]
"To be frank, at this point it is quite hard to see how they
are going to maintain the 44 trillion yen," David Riley, co-head
of global sovereign ratings at Fitch, told Reuters Television in
"It's not the sole determinant that will drive our assessment
but other things being equal, then I think that would prompt us
to review Japan's current double AA-minus rating."
Reflecting investor concerns over the government's budget,
yields on benchmark 10-year Japanese government bonds hit a
five-month high on Tuesday of 1.485 percent JP10YTN=JBTC and
the JGB yield curve is its steepest in over three years.
For a graphic on credit default swap spreads and 10-year
government bonds, click: r.reuters.com/wuw68f
Apart from the sharp move in the CDS market, the interest
rate swap curve has hit its steepest level in four years as
investors believe bond investors may start to choke on swelling
debt issuance by the government. [ID:nSP483393]
"The rise in yields likely reflects uncertainty about the
budget," Finance Minister Hirohisa Fujii told reporters after a
"I'm concerned about the rise in yields. It is most important
that we do not lose the trust of the bond market. We will simply
have to cut spending," he said.
He reiterated that he wanted to limit JGB issuance in the
fiscal year starting next April to 44 trillion yen. December
10-year JGB futures 2JGBv1 rose 0.10 point to 137.48 following
"This was the kind of comment the market needed as the
authorities had not shown too much concern over the recent rise
in rates," said Katsutoshi Inadome, a fixed-income strategist at
Mitsubishi UFJ Securities in Tokyo.
"But the market will need more reassurance as investors await
developments in the government's upcoming issuance plans,"
The government is working to cut back on ministry budget
request to spend a record 95 trillion yen in 2010/11.
A poll on Tuesday showed that support for the two-month old
government had slipped eight points to 63 percent. [ID:nT275095]
The Yomiuri poll found 85 percent of voters said they would
rather see the government break some campaign promises than let
public debt rise further.
Japan's debt burden is the worst among major economies at 170
percent of gross domestic product. It is currently offset by low
interest rates but conditions may not remain so benign, Standard
& Poor's analyst Takahira Ogawa said on Monday.
S&P's rating on Japan is AA, two notches below its top
rating. The agency noted a lack of detail in the government's
plans to make budgetary allocations more efficient and effective.
A ratings downgrade would raise borrowing costs in Japan to
reflect the perceived higher risk and threaten a recovery from
the country's worst recession in decades.
Still, analysts said the chances of a downgrade were
relatively low as about 92 percent of JGBs are held by Japanese
"Yields are determined by domestic investors and they are a
captive market, so the doomsday scenario will likely be avoided,"
said Dariusz Kowalczyk, chief investment strategist at SJS
Markets Ltd in Hong Kong.
"A downgrade could prompt a rise in yields, but it's probably
not the case that yields will rise to a level that reduces
Kowalczyk added that 10-year JGB yields are still relatively
low at around 10 basis points above the average yield over the
past 12 months of 1.365 percent.
The Democrats rode to power in an election in August pledging
to pay out household allowances, make high schools free and
abolish surcharges on cars and gasoline.
But the new government's spending schemes look increasingly
in doubt as its efforts to root out wasteful spending came up
with less than half of the funds its said it would need for its
policies in the first year of the new administration.
The government is also under pressure to rein in its spending
plans as they will likely have to issue a record amount of JGBs
this fiscal year to cover a tax revenue shortfall that may be 6
trillion yen or more.
(Additional reporting by Shinichi Saoshiro, Hideyuki Sano, Kei
Okamura in Tokyo, Umesh Desai in Hong Kong; Editing by Hugh