Investors held on tightly to Japanese government bonds despite Moody's Investors Service cutting Japan's credit rating by one step on Aug. 24, as the Japanese deficit remains the worst among industrialized nations.
Ninety percent of the holdings of Japanese government bonds are in Japan--most of them financial institutions--and investors are not in a hurry to sell off their holdings, unlike foreign investors, analysts say.
Moody's Investors Service downgraded Japanese debt rating to Aa3 from Aa2, placing Japan at the bottom of the ranking for major advanced economies.
Japan sits lower than Italy and Spain, which are saddled with fiscal woes.
Unlike Japan, the two European countries struggled with volatile markets as a frenzy of a sell-off of their government bonds spiked yields and pushed down their prices.
In contrast, the yield of the newly issued 10-year Japanese government bonds was down slightly to 1.010 percent per annum on Aug. 24, 0.005 percentage point lower than a day earlier.
"When the future of the global economy is uncertain, investors tend to purchase Japanese government bonds because they regard them as safe assets," said Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute.
Moody's cut did not prompt a sell-off of the yen, either.
The yen was still trading in the upper part of the 76 range against the dollar.
The Japanese government bond market appears unshaken despite the country's notorious deficit ballooning to 900 trillion yen ($11.75 trillion), the worst among industrialized nations.
The health of the government bond market can be measured by a difference between overall personal financial assets and the national debt. Currently Japan has a 600 trillion yen surplus in that equation.
An estimated 1,500 trillion yen in personal financial assets in Japan shore up the government bond market through deposits and insurance premiums paid to financial institutions. Japanese businesses hold 250 trillion yen in net assets overseas.
In Spain and Italy, half of government bonds are held by foreign investors, and the two countries' net assets are in the red.
Still, markets are concerned about the outlook of the Japanese economy, as was symbolized by the recent downgrade. The price of government bonds could drop sharply and yields rise when Japanese can no longer afford to save money as the society ages.
The country's debts will keep snowballing if the government does not implement measures immediately to reduce deficits.
A director at a mega bank painted a bleak picture of the bond market, saying, "savings at financial institutions may take a downward turn in five years."
Analysts say it is crucial for the government to take steps to prop up the bond market before that happens.
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