No. 6 — February 11, 2000

 

Weekly Review

MOF'S DEBT MANAGEMENT TAKES A NEW TURN
--- by Douglas Ostrom

Tokyo's management of Japan's public-sector debt is unique in its ability to scare or at least confuse analysts on both sides of the Pacific. That reality was highlighted by the flap in late January and early February over a government plan to borrow money from the nation's commercial banks. The proposal raised eyebrows because Tokyo, like Washington, almost always prefers the generally cheaper option of issuing government securities when it needs money. Moreover, the Ministry of Finance will raise real money — to the tune of ¥8 trillion ($72.7 billion at ¥110=$1.00) — in this fashion during the fiscal year that begins April 1.

The controversy suggested to some people that Tokyo might be trying a maneuver that would accomplish several questionable objectives at once. While plausible, this argument at best supplements explanations of MOF's apparently unusual behavior that are both simpler and less sinister in their implications.

Analysts skeptical of MOF's motives saw in the plan a scheme to prop up the banking system. By borrowing from major banks — which have ample funds to lend since they are reluctant to provide funds to private-sector borrowers — the government would create for them a revenue flow that is especially welcome, particularly if Tokyo, as reported, is going to pay rates higher than the returns on the government securities that banks otherwise would purchase. Not only could the administration of Prime Minister Keizo Obuchi advance its policy objective of nursing banks back to health, but such a move also would help protect the government's own ¥9.5 trillion ($86.4 billion) equity position in the same institutions (see JEI Report No. 43A, November 12, 1999). Of course, if this were MOF's primary goal, it would be implementing policy in a very nontransparent fashion.

The other concern had to do with improving the health of the government itself. Japan's gross public-sector debt now is close to the highest in the industrialized world and is rising rapidly (see JEI Report No. 2A, January 14, 2000). U.S. credit-rating institutions already have downgraded the debt once and may do so again. The most obvious forms of this debt are short-term and long-term government securities. Tokyo may have figured that by borrowing money directly from banks instead of floating bonds, its increased indebtedness would escape notice and thereby do less to imperil its credit rating.

Of course, with the borrowing story featured on the front page of The New York Times after receiving major play in the Japanese press, hopes of creating a backdoor deal to bail out banks or of conducting a covert fund-raising scheme have evaporated. If either reason were paramount, MOF might have been expected to back away from its plan. That has not happened.

The real motivation for the admittedly unorthodox scheme lies in Tokyo's arcane budget rules, which, because they are in flux, are even more confusing than normal. MOF will be borrowing money not to cover general government operations but for the purpose of financing subnational governments. Until very recently, such funds would have been borrowed in effect from the postal savings system, various government social security-like plans and other public-sector institutions, with MOF's Trust Fund Bureau acting as the intermediary. In fact, as of March 31, 1998, subnational public bodies had outstanding debts of ¥58.5 trillion ($531.8 billion) with the Trust Fund Bureau.

Government trust funds no longer can be tapped so easily, however. This spring, the Obuchi administration will introduce legislation in the Diet that will have the effect of substantially loosening the links between the postal savings system on the one hand and loan recipients on the other. In the future, each side will be expected to follow market principles in allocating and raising funds. But, even before the bill is drafted, Tokyo could face another fund-raising problem. The postal savings system, the largest single source of Trust Fund Bureau money, is widely expected to suffer at least a short-run net outflow as long-term deposits come due in unusually large amounts. While a careful analysis indicates that any outflow over a longer time frame is likely to be minimal, previous experience involving similar maturity periods suggests the likelihood of considerable churning and some drop in postal savings balances during the span of a few months as depositors evaluate their options. Given this prospect, MOF officials say that they decided to assign priority to long-term recipients of Trust Fund Bureau money. Subnational government needs are regarded as short term.

In sum, the Trust Fund Bureau will not be in a position to lend money to prefectural and local governments in FY 2000. Even if the Finance Ministry could finesse the legal hurdles that stand in the way of issuing government securities to raise money for this unconventional purpose, the short-term government securities market in Japan remains underdeveloped. A recent study by the Organization for Economic Cooperation and Development found that only 5 percent of outstanding Japanese government debt had an original maturity of one year or less in 1997 versus a comparable figure of 21 percent for the United States. Thus, borrowing is Tokyo's default option.

Commercial banks are the obvious choice for lending the massive amounts involved. Moreover, MOF insiders insist that banks will make competitive bids for the right to provide this money. They also claim that published reports that the government will pay a relatively high interest rate or that the borrowing costs already have been set simply are incorrect.

In any event, the Finance Ministry — known for its conservative bias on tax rules, government deficits and the like — is hardly likely to pay more than it has to for money, regardless of the reason. However, MOF is equally known for its lack of transparency, particularly with respect to budgetary and financial matters. As such, few analysts are surprised that the ministry's motives on an issue that involves both financial institutions and budgets would be questioned.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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