As debt piles up, Japan tries to lock in low borrowing costs

TOKYO (Reuters) - Japan may borrow more debt over a longer horizon as the country steps up its already super-loose monetary policy to prop up economic growth and avoid slipping back into deflation.

Japan's national flag is seen behind a traffic signal of a red man at the Bank of Japan headquarters in Tokyo November 19, 2014. REUTERS/Yuya Shino

The plan is seen aimed at taking advantage of central bank stimulus to lock in low borrowing costs for the longest period of time and to reduce the need for future debt rollovers as Japan’s public borrowings continue to snowball.

The Ministry of Finance is considering raising the issuance of 30- and 40-year government bonds by a total of 2 trillion yen ($17 billion) in the new fiscal year starting in April, government officials with knowledge of the matter told Reuters.

It is also likely to reduce issuing short-term debt, such as two- and five-year notes, and trim the total issue from 155.1 trillion yen planned for the current fiscal year, they added.

The MOF is contemplating an increase of around 1 trillion yen each in the issuance of 30- and 40-year JGBs and plans to float the idea when ministry officials meet primary dealers on Friday before making a final decision, the sources said.

The move is not directly related to Prime Minister Shinzo Abe’s decision on Tuesday to delay a planned consumption tax hike, but reflects growing concerns among some policymakers and bureaucrats that bond yields risk rising if no credible measures are taken to curtail debt.

“Considering Japan’s dire fiscal conditions, it is hard to envisage a sharp improvement, which is why they want to fix long-term debt at low rates,” said Hidenori Suezawa, fiscal analyst at SMBC Nikko Securities.

So far, the country has no problems financing its debt, which has reached over 200 percent of gross domestic product.

Domestic investors, with huge savings, have been happy to buy government bonds at time of deflation even as Japanese government bonds have one of the lowest yields in the world.

Yet, there are creeping worries that the country’s fiscal time bomb may be ticking quickly as Tokyo does not have a plausible plan to balance its budget even as its population looks set to age and decline faster in coming decades.

Highlighting the delicate balance Tokyo has to strike between spurring growth and tightening its fiscal belt, the Japanese economy unexpectedly slipped into recession after the first leg of a sales tax increase in April.

Abe’s decision to postpone the second part of the tax hike to 10 percent from 8 percent further makes it difficult to achieve the government’s goal of balancing the budget, excluding debt-related revenues and expenses, by 2020.

But even before Abe’s move, the country’s finance ministry had long been seeking to extend the average maturity of its debt stockpile, which reduces the need for future debt rollovers.

“From a debt management point of view, it is natural to increase long-dated bonds,” said a government official who has knowledge of the matter.

In the current fiscal year to March, the ministry plans to sell 1.6 trillion yen of 40-year bonds and 8.0 trillion yen of 30-year bonds, both record amounts.

There was muted reaction in the JGB market as the move was widely expected and traders already see that the BOJ’s massive bond purchases will bring down yields.

Yields on 30- and 40-year bonds have fallen sharply since the Bank of Japan stepped up buying in these maturities following its surprise easing on Oct. 31.

The 30-year JGB yield stood at 1.425 percent JP30YTN=JBTC on Wednesday, down from 1.445 percent earlier in the session, and way below Japan's inflation levels. Core consumer price inflation was 3.0 percent in September, or an estimated 2.0 percent when the effect of a sales tax hike is excluded.

(1 US dollar = 117.0600 Japanese yen)

Additional reporting by Lisa Twaronite; Editing by Eric Meijer and Jacqueline Wong