Japan economists call for 'Obama bonds' By Kosuke Takahashi
TOKYO - Japanese economists, increasingly concerned that the United States
might seek to pay its enormous and growing debt obligations in a weakened US
dollar, are looking to the possibility of US Treasuries being issued in yen.
The US government needs to borrow at least US$1 trillion in the coming year,
excluding the US Treasury's $700 billion plan to bail out the financial and
other industries, said Kazuo Mizuno, chief economist in Tokyo at Mitsubishi UFJ
Securities Co, a unit of Japan's largest publicly traded lender by assets. That
amount is likely to grow as the US government continues to rescue failed parts
of the economy and has to raise more debt - that is, issue
government bonds, or Treasuries - to fund such rescues.
Since 2004, when the amount of the government bond issuance reached an annual
average of $400 billion, 94% of new buyers of US government bonds have been
foreigners, Mizuno told Asia Times Online.
One measure of the increased concern at the ability of the United States to
finance its enormous deficits in the future is the rising cost of credit
default swaps bought as protection of Treasury debt. These traded near a record
high on Tuesday, with benchmark 10-year contracts on Treasuries increased to 42
basis points, or 0.42 percentage points, from around 20 in early September. The
contracts have also risen from below two basis points at the start of the
credit crisis in July 2007.
While it remains unlikely that the US government will default on its debt, a
weaker dollar would ease the burden of payment on existing debt.
In the past few months, the US dollar has strengthened against other major
currencies, with the notable exception of the yen, even as the country has been
at the epicenter of the deepening financial crisis. That dollar strength is not
expected to last.
"There is no wonder the dollar will weaken," said Eisuke Sakakibara, Japan's
former top currency official and now a professor at Waseda University. "The
dollar now looks strong for a technical reason. The money the US financial
firms had invested in the world is being repatriated into the homeland, causing
dollar-buying. But once this conversion into the dollars is done, the currency
will head south," Sakakibara said at a forum in Tokyo on Sunday.
Faced with the unprecedented growth of the US budget deficit and the prospect
of an increasingly weaker dollar compared with the yen reducing the value of
Treasury debt held by Japan, economists in Tokyo are calling for the
administration of president-elect Barack Obama to issue US Treasuries
denominated in yen and other currencies. The issuance of foreign
currency-denominated US Treasures would reduce the perceived risk of holding
the debt.
The idea of issuing foreign currency-denominated US Treasures is not new. The
Jimmy Carter administration, buffeted by the two oil crises of the 1970s, sold
"Carter bonds", denominated in German marks and Swiss francs, in 1978 to
attract foreign investors into Treasuries.
"The US will be forced to issue foreign currency-denominated US Treasures in
its hour of need," said Mizuno. "The US cannot finance its deficit by itself.
The US financial system cannot survive without foreign investors. We will see
'Obama Bonds' in the future."
With the US owing increasing amounts to foreign nations, the confidence in US
Treasuries continues to be shaken, said Masaaki Kanno, chief economist at
JPMorgan Securities Japan Co in Tokyo, said. "This will push up long-term
yields, and the dollar will be sold," said Kanno, speaking at the forum in
Tokyo on Sunday.
So far, the Japanese yen has been the biggest winner out of the current
financial turmoil as investors increasingly unwind the so-called yen carry
trade, in which yen borrowed at low interest is changed into other currencies
and invested for higher yields than the interest charged on the yen loan.
The yen has advanced 15% versus the dollar this year, 33% against the euro and
53% against the pound sterling. The yen may rise to 85 per dollar this year,
predicted Masaki Fukui, senior market economist in Tokyo at Mizuho Corporate
Bank Ltd, a unit of Japan's second-largest financial group by market value. The
Japanese currency at present is trading at about 96.28 to the US dollar.
"Japan’s financial authorities may intervene in the foreign exchange markets
only when the yen breaks 90 per dollar," Sakakibara said.
As the yen strengthens, the effective value of debt held in dollars will
decline, a fate that yen-denominated Treasuries would escape.
"Yen-denominated US Treasuries would reduce currency risks for Japanese and
Chinese buyers of US Treasuries," said Fukui. "If concerns over US Treasuries
continue to grow, no one will want to buy them. Yen-denominated US Treasuries
would make it easy for foreign investors to buy them."
Looking ahead to 2009, foreign buyers such as Japan, China and other emerging
market central banks are likely to reduce their holdings of US Treasuries
rather than increase them, as their own countries face massive funding needs to
buoy their economies at home and as America will continue to face financial
instability and deteriorating economic fundamentals.
Japan holds the world's second-largest foreign reserves, totaling about $1
trillion, following China, which has about $2 trillion in forex reserves,
including some $600 billion worth of US Treasuries. Japan plans to provide up
to $100 billion to the International Monetary Fund, which would reduce the
nation’s holding of short-term US Treasury bills.
China on November 9 announced its sweeping economic stimulus package valued at
about 4 trillion yuan ($586 billion), to be spent over the next two years.
Market players are speculating China, to secure financial resources, would
reduce its holding of US Treasury securities rather than increase them.
Kosuke Takahashi is a freelance correspondent based in Tokyo. He can be
contacted at letters@kosuke.net.
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