Wednesday, January 30, 2008

Japan To Securitize

Sources: FT, Bloomberg

Japan is prepared to sell over 100 billion yen (US$ 963 million) of government-backed bonds to state agencies in order to alleviate some of the public debt load. This is part of a broader plan to eventually “securitize” nearly 400 billion yen (US$ 3.74 billion) to hospitals, schools, and other government agencies. This scheme is aimed at shrink government assets by 140 trillion yen, and to cut debt in half by 2015. Japan currently holds 707 trillion yen in assets—including 233 trillion yen of government-backed loans. Japan has some of the highest proportion of assets to GDP.

The bonds will be priced sometime between the 22nd and 25th of February, and analysts predict the price will be “key.” A slowing economy requires a “higher premium” on these bonds. Nevertheless, S&P has rated the bonds AAA (the highest rating), and other pundits believe that this process will be highly attractive. John Richards, of the Royal Bank of Scotland, predicts that these bonds would be “well-received” because of the “scarcity of [attractive] bonds in Japan. Japan is likely keen to securitize some of its assets because this will allow for better refinancing of the national debt at lower interest rates.

Question: If the bond prices are too low, how will the Japanese government cope with less than expected demand? Furthermore, Japan was one of the latecomers to the “securitization” movement. Why might that be?

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