The Japanese government is likely to issue several trillion yen worth of additional government-guaranteed bonds to fund banking reform in the coming weeks, Mr Hakuo Yanagisawa, financial reform minister, indicated yesterday.
The issue of additional bonds could deal a further blow to JGB markets, which have already seen prices tumble in recent weeks on fears of excess supply.
Sentiment in the market worsened yesterday after the Bank of Japan's announcement last Friday that it would not buy more JGBs, even though it planned to reduce the overnight market rates to a historic low of 0.15 per cent. The yield on the 10-year benchmark JGB closed at 2.14 per cent yesterday, 0.6 percentage points up from the close on Friday.
Mr Jeffrey Young, analyst at Salomon Smith Barney in Tokyo, said: "If the (government) has to raise more money to finance the recapitalisation of the banking sector . . . there's a potential for a sharp sell-off in the bond market."
The issue of funding bank reform is particularly critical because last Friday the Financial Reconstruction Committee, the government body charged with implementing banking reform, reported that the largest banks had asked for a Y7,450 billion injection of public funds.
The FRC had hoped these injections would come from Bank of Japan loans to the Deposit Insurance Corporation, another government body that funds bank reform. However, the bank has recently opposed this plan because it fears extending loans to the DIC would undermine its credibility as a central bank.
