SETTING FASTER:

Inflated fertility rate used for pension bills: Ministry allegedly sat on lower figure (REIJI YOSHIDA, June 23, 2004, The Japan Times)

Health, Labor and Welfare Ministry officials said Tuesday they had estimated a record-low fertility rate in 2003 of 1.29 almost two weeks before the contentious pension reform bills were pushed through the Diet on June 5, based on a rosier figure.

The government's pension reform package was based on a more optimistic fertility rate of 1.32 for the year, forecasting it to eventually recover to around 1.39. A figure above 2.08 is needed to sustain the population. [...]

The government's fertility rate forecasts have been consistently overoptimistic for more than two decades, forcing it to repeatedly revise down pension premium revenue assumptions.

A higher birthrate prediction is politically favorable for the government, which has been trying to bathe its social security plan in a rosy glow.

The correct number was lost in translation...

MORE:
Effects of zero-interest rates (Japan Times, 6/23/04)

More than a decade has passed since the Bank of Japan brought benchmark interest rates to almost zero. Now that Japan's economy is showing signs of steady recovery, it stands to reason that this extraordinary policy of quantitative monetary easing should come to an end. Yet, reversing a policy that has persisted for so many years may prove difficult. [...]

One major consequence of rock-bottom interest rates is an enormous glut of government bonds. Over the years the Finance Ministry has issued massive amounts of long-term debt, which have been purchased mainly by financial institutions and institutional investors. Now, however, they are beginning to sell some of their bloated bond holdings to avoid risks. As a result, bond prices are falling while long-term interest rates are rising.

The numbers boggle the mind. The balance of government bonds stood at 460 trillion yen at the end of March. Of this, 85 trillion yen (including bonds issued to finance the fiscal loan and investment program) was held by the BOJ, 120 trillion yen by banks and 116 trillion yen by insurance companies and pension funds.

Lower bond prices lead to higher valuation losses for bondholders. In the business year that ended March 31, however, these holding losses by banks were apparently offset by rising stock prices. By contrast, the BOJ recorded its first current-account deficit in 32 years, mainly due to a huge holding loss of 1.1 trillion yen. As a result, the bank's capital adequacy ratio reportedly dropped below the international standard of 8 percent.

Falling bond prices, if the trend continues, will also hit banks. The bonds they hold will depress profits if these assets become new "nonperforming loans." If that happens, banks will be left holding the bag again. The timing could not be worse because their painstaking efforts to clean up nonperforming loans to businesses are finally bearing fruit.

Who would buy the bonds of a dying nation?

Posted by Orrin Judd at June 22, 2004 8:57 PM