Japanese Government Bonds Review

Japanese Government Bonds

Japanese Government bonds, similarly to government bonds of any country, are in fact debt securities or promises to return your money at the end of the bond term along with interest, unless it’s a zero coupon bond. In order to assess the risk associated with Japanese Government bonds or any other bonds issued by other foreign government, one needs to consider an overall political and economic stability of a certain country.

For example, Australian Government bonds will yield less bond interest rates because they have a well established economy and history of bond repayments. On the other hand, investing in government bonds of Italy or Greece, for example, will offer higher bond interest rates in order to attract more investors; however, investing in highly unstable economies comes with an inherited risk of never seeing your principal investment again, let alone interest payments. One would think, the same will apply to Japan but the situation on the Japan’s bond market begs to differ.

In Japan the debt to GDP ratio has always been one of the highest in the world, which is not a good indicator of its economic health. Despite this fact, Japanese Government bonds have historically brought pretty low but stable yields. This is explained by the fact that 95% of Japanese government securities are mostly held by domestic investors rather than foreign ones. Due to Japan’s insanely high debt to GDP ratio coupled with low returns (average with below 2%), foreign investors have always been discouraged about the Japan’s Government bond market. Market analysts agree on one thing – if the Japanese Government does not make extra efforts to encourage its bond investors with higher interest rates, this may scare even the domestic investors despite their traditional trust.

Investors need to look not only at Japanese government’s economic stability, yen currency standings and potential growth but also at major natural disasters that might be taking place on its territory, massive earthquake and tsunami that devastated parts of Japan in March of 2011 costing an estimated 25 trillion yen in fiscal funds. Moreover, how will the March 2011 Tsunami and the subsequent ecological disaster of the Fukushima Nuclear Plant further affect the economy of Japan, including its agricultural, manufacturing and tourism sectors? All of these factors could cost Japan considerably more in the future that is still unclear. If you add all the pending Japanese reconstruction costs and compensations to families who suffered losses during this massive natural disaster, this could amount to a lot more national debt down the road that is still hard to predict.

In the light of this, Japanese Government has started to widely issue Reconstruction Japanese Government bonds for almost 12 trl yen in 2011 to cover the massive costs needed to revamp large areas that suffered losses during the tsunami disaster followed by another almost 12 trillion yen in 2012. In addition, the government is also planning to carry out tax increases by an approximate 0.05% to help fund the substantial pending construction costs.

Since Japan is now in the second year of recovery, many bond market analysts agree that depending on government immediate policies various scenarios on the Japanese bond market might unfold. In case the crises results in the immediate investor opportunistic activity, the outcome will be very bright resulting in higher Japanese Government bonds yields. If, on the other hand, investors’ fear will detract domestic and foreign investors, the results could be devastating for the Japanese economy. Investors’ expectations are the main driving force in the Japanese economy and the bond market at this point.

Bottom line, unless the Japanese short and long term government bonds’ interest rates go up and investor interest is highly engaged, it might potentially be wise to invest in Japanese bond market. However, if the situation does not change, Japanese government might not be able to pay back its bond holders within the next 10-20 years. The same stands true with Japanese savings bonds, wait and see if the Japanese government makes any changes and act accordingly.