Moody's: Japan's weakening saving bias could in time raise risk of funding public debt

Moody's Investors Service says that pressures on the Government of Japan's (A1 stable) ability to finance its debt at highly affordable rates are gradually building, but support from domestic investors is unlikely to diminish significantly over the rating horizon.

The country's huge pool of household savings plays a crucial role in providing ready and cheap funding for Japan's government debt burden, which is among the highest in Moody's rated universe. However, growth in household savings has stagnated at a low level in recent years and may ebb further as Japan's population ages.

But even if growth in the stock of financial assets held by households were to gradually taper off by 2020, those savings would remain more than ample to accommodate Japan's general government debt, Moody's says.

Moody's conclusions were contained in a just-released report, entitled "Government of Japan: Weaker Saving Bias Could in Time Raise Risk of Funding Public Debt."

Moody's view is that an inflection point in Japan's funding conditions could ultimately arise if the stock of government debt were to exceed private-sector savings. But this scenario is unlikely to occur until well beyond the current rating horizon of three to five years.

JGB funding pressures could initially increase if the government achieved its goal of sustainably boosting nominal growth and inflation. This development could make JGBs less desirable to investors, spurring them to demand higher yields.

The Bank of Japan's bond-buying policy has supported low yields by offsetting the impact of slower growth in household savings. But the eventual end of this policy, is another factor that raises uncertainty about the outlook for JGB yields.

Any rise in investor uncertainty about the government's ability to deliver on its reform pledges also has the potential to push up borrowing costs.

But in all these scenarios, the government's budgetary interest costs would mount only gradually in response to higher bond yields, given the long average duration of Japanese public debt. Yields on 10-year JGBs also remain well below the interest costs of government bonds for other major industrialized nations.

In addition, if the government's Abenomics reforms gain traction, stronger economic conditions should increase tax revenues, which could cover larger debt interest costs. They could also boost disposable incomes, and ultimately support household savings.