JGBs could imperil Japan by 2016

Mitsubishi UFJ Financial has identified 2016 as the year where things could go from bad to worse for Japan.

The bank is drawing up a contingency plan that estimates 2016 as the year when Japan's current account may tumble into deficit and trigger a Japanese Government Bond (JGB) sell-off. It estimated late last year that 10-year bond yields could rise to around 3.5% in about four years' time from about 1% today.

JGB prices, however, have so far shown no signs of weakness with 10-yield yields now below 1%. If yields rise, however, JGB prices will fall and could force banks to write down their holdings and take hits to their capital.

In such a case the bank, which holds some US$39.4 billion in bonds with more than 10 years to maturity, would sell as much of those bonds as possible and shift to short-term bills.

For more than a decade, Japan's government has funded its massive debt at home and at minimal cost from a vast pool of domestic savings and Japanese investors' aversion to assets they perceive as riskier, such as shares and foreign bonds.

Japan's debt burden is about twice the size of its gross domestic product and is the worst among industrial nations