With the government in Japan weakening its assessment of the economy and talks with Nobel Prize winning economists, many are thinking that Abe will look to delay the increase in consumption tax due a year from now. The government is hoping this will boost confidence in the private sector, increasing spending by consumers and wages by companies. This is concerning in the long run because it will shake the foundation of the confidence in the bond market. As discussed in an earlier post the inflationary expectations will be the biggest factor to get people and companies to spend savings.
Japan is facing issues with the amount of debt that they are buying back in an effort to spur inflation, not from the lack of inflation being spurred but from the very outcome they are looking to achieve: inflation.
Once Japan reaches its goal of spurring inflation (in all fairness they have a long way to go with that) and inflation expectations start to creep into the economy and businesses more money will be spend on consumption and business expansion. This will take a portion of the buyers of JGBs out of the market at the same time that the Bank of Japan is looking to cut back on the asset purchasing. The question to ask then is who will be the buyer of JGBs?
When this comes there will be a need to build confidence with international investors that the government is serious about its debt load and offer a higher rate to attract investors from higher rates in the US or EM if volatility resides. If this cannot be achieved the BOJ will have to continue to be the buyer of most of the bonds issued in order to fill the budget gaps and rolling of debt. This could effectively get Japan stuck into a scenario where they will have to monetize their debt as well as large portions of their budget. It will be at this time that Abe and others in Japan will look back on what confidence they should have been trying to restore.