For the first time in a century, Japanese finance officials will travel abroad next week to drum up sales for the nation's bonds among foreign investors, with stops planned in New York and London.
It will be the first overseas excursion to sell bonds since one that began in 1904 to finance the Russo-Japanese War, which Japan won a year later. This time, the only enemy is the rapidly advancing government debt, and Japan is likely to face a much longer battle before it is brought under control.
Japan, which has the world's second-largest economy, has the worst fiscal health of any developed nation, with outstanding national debt that is expected to grow next year to ¥774 trillion (US$7.4 trillion), or 150 percent of the size of the country's output. That is by far the largest ratio among the Group of Seven industrial nations. And with the government running a deficit this year of ¥34.4 trillion ($330 billion), its 15th consecutive, the number is not expected to improve anytime soon.
The debt, which Japan's central bank chief, Toshihiko Fukui, once called a "buried land mine," is making Japanese officials nervous about finding buyers. Next week's road show for bankers, fund managers and executives at other institutions aims to expand the pool of investors beyond the relatively small group of Japanese banks and insurers that own most of the debt now.
"The fiscal problem is not going to go away and it cannot be solved quickly. It can only be solved over time," said Jesper Koll, chief economist for Merrill Lynch in Tokyo. "And when you need to solve something over time, the top thing you have to focus on is to get investors to buy into your plan."
The low ratings on Japanese debt will make this a challenge. Both Moody's Investors Service and Standard & Poor's rate Japanese government bonds the lowest among the Group of Seven nations. Moody's A2 puts Japanese debt below Botswana's.
About 60 percent of Japanese bonds are held by the nation's banks and insurers -- including the government-run postal savings and insurance system -- and only about 4 percent by foreign investors, half the share they held five years ago and much less than in other big economies. Forty percent of US Treasury securities are in the hands of foreigners, and the proportion is roughly the same for German government debt.
That so much of Japan's debt is held by a relatively small group of Japanese financial institutions is a risk, given the possibility, however remote, that the group could become sellers all at once. Any decline in bond prices would push yields up, which would ripple through rates on mortgages to credit cards and car loans, seriously damping Japan's still fluttering economic recovery.
Moreover, analysts say banks' appetite for government bonds is waning. Amid a long decline in demand for loans, banks have had little else to do with their money. But with Japan in the second year of a recovery, loan demand may pick up.
And to foster that recovery, finance officials are more eager than ever to line up new buyers for Japanese bonds -- any slackening in demand could move interest rates up.
Japan's bond salesmen will travel to London on Tuesday and to New York on Thursday, where they expect groups of more than 100 large investors to turn up for their pitch.
To be sure, it will be a tough sell. After a rally that has lasted more than a decade, few people expect Japanese bonds to rise further. Yields are low; after peaking at more than 8 percent in 1990, the yield on the 10-year government bond slid to an all-time low of 0.4 percent two years ago.