UPDATE 3-Japan bond sales may keep climbing in 2011/12-media

(For more stories on the Japanese economy, click [ID:nECONJP])

* Rise due to social welfare costs, slumping tax revenues

* Japan’s economy fragile, retail sales fall

* S&P threatened Japan with downgrade, CDS near 10-month high

* Market shrugs off issuance, 2-year auction sees good demand
(Adds details on government, 2-year auction)

By Leika Kihara

TOKYO, Jan 28 (BestGrowthStock) – The Japanese government’s new bond
issuance is set to climb a quarter in the four years from fiscal
2010/11, media reported on Thursday, casting doubt on the
government’s ability to avoid a ratings downgrade.

The government is under pressure from ratings agencies to
keep a tight rein on its finances and markets are already jittery
that it could face a future funding crunch as public debt climbs
to almost twice the size of the economy, by far the heaviest
burden in the developed world.

Investors have been concerned that the Democratic Party-led
government, whose popularity has been slipping since it took
power in September, will spend more to bolster the economy ahead
of an upper house election in mid-2010. [ID:nTOE60R036]

The increased issuance doesn’t account either for any
additional costs that will arise if the Democratic Party carries
out its campaign pledges, which included full payouts to
households with children, the media reports said.

“The reported figures on bond issuance simply underline why
we think the negative outlook on the sovereign rating is
appropriate at this stage,” said Agost Benard, associate director
for sovereign ratings at Standard & Poor, which downgraded its
outlook on Japan earlier this week.

The government has agreed to raise new bond issuance in
fiscal 2010/11, which starts on April 1, to 44.3 trillion yen
($490 billion).

The media reports said that would increase to 51.3 trillion
yen in fiscal 2011/12 and by 2013/14 would be 55.3 trillion yen,
a quarter higher than 2010/11.

Finance Ministry officials declined to comment.

“The estimates for new bond issuance make sense, and a
ratings downgrade is certainly possible,” said Nobuto Yamazaki,
executive fund manager at DIAM Asset Management in Tokyo.

“The real question is whether the government will try to
spend more. Given the remaining work needed for their fiscal
strategy, tax hikes could be the next step. Yields may seem low,
but they’d be even lower if we didn’t have fiscal problems.”

(For a graphic on Japan’s public debt, revenue and spending
since 1975 click: http://link.reuters.com/paw97f )

SCEPTICAL

Still, the estimates were met with some scepticism by
financial markets, where the 5-year/20-year spread on government
bond yields was little changed at 1.622 percent and Japan’s
5-year credit default spread held steady.

That’s because the estimates are from the finance ministry, a
proponent of fiscal restraint, and not the government’s official
issuance plan. Actual issuance in future years may be quite
different from the ministry’s estimates reported by the media.
[ID:nTOE60R06I]

The Asahi newspaper, citing the ministry estimates, said the
increased issuance would help cover rising social welfare costs
and slack tax revenues.

Previous governments spent big on public works to try to
stimulate the economy through a decade of stagnation after a
property bubble burst leaving banks mired in debt.

The current government is also worried that weak demand and
deflation will tip Japan back into another recession, raising the
prospect that it might increase spending to support the economy.

Japan emerged in the second quarter of 2009 from its deepest
recession since World War Two sparked by the global financial
crisis. [ID:nT212505]

While investors are worried the government may increase
spending in the months ahead, ratings agencies are also worried
about the country’s rising debt.

Standard and Poor’s said on Tuesday it would cut Japan’s
rating unless it produced a credible plan to rein in debt and
lift growth in an economy plagued by deflation. S&P’s move led to
spreads on Japan’s credit default swaps expanding to their widest
point in 10 months. [ID:nSGE60P081]

Fitch, another ratings agency, also threatened to cut Japan’s
rating if new bond issuance in 2010/11 greatly exceeded 44
trillion yen. [ID:nT218318]

The government is compiling a long-term plan to maintain
fiscal discipline, but the results may not be available until
June.

The finance ministry will submit the new issuance estimates
to parliament shortly, Asahi said. Kyodo news also reported
similar figures, citing finance ministry estimates.

Japan’s huge domestic savings mean it can easily finance its
debt in coming years, but the risk of default is seen rising in
the future as Japan’s saving rates are expected to fall in line
with the rapidly ageing population.

The government will also start working on the budget for
fiscal 2011/12, when spending is expected to rise even more as
many of the Democrat’s campaign pledges such as payouts to
households with children are expected to be enacted in full.
($1=89.94 Yen)

Investment

(Writing by Stanley White. Additional reporting by Rie Ishiguro;
Editing by Edwina Gibbs)

UPDATE 3-Japan bond sales may keep climbing in 2011/12-media