Wednesday, 4 March 2015

Japan Public Debt is Keeping BNP's Chief Credit Analyst Awake at Night

BNP Paribas Chief Credit Analyst Mana Nakazora
Mana Nakazora, chief credit analyst in Tokyo at BNP Paribas SA. 

Photographer: Akio Kon/ Bloomberg
by William Finbarr  FlynnTesun Oh | 7:01 AM PST | March 3, 2015

(Bloomberg) -- For most of her career, Mana Nakazora has taken a pre-dawn train to work regardless of whether she arrived home just hours earlier.

Her colleagues describe BNP Paribas SA’s Tokyo head of investment research as a powerhouse, and she was Japan’s No. 1 bond picker from 2010 to 2012 and No. 2 for the last two years in Nikkei Veritas newspaper polls. Even now, investors thank her for warning against getting into Lehman Brothers Holdings Inc. before the investment bank collapsed in September 2008.

“She’s frank and she says things that are difficult to say,” said Keisuke Tsumoto, the head of fixed income for Japan at Manulife Financial Corp.’s asset management unit in Tokyo, which manages money for Japan’s Government Pension Investment Fund. “What she can’t write down, she lets us know verbally.”

One thing keeping her up -- analysis of Japan’s public debt, which is expected to climb to 1.06 quadrillion yen ($8.85 trillion) at the end of March. With a population that’s been shrinking for the past six years and annual debt servicing costs that are bigger than New Zealand’s gross domestic product, the world’s third-largest economy is quite simply running out of people who can pick up the tab.

“Maybe there’s no point in throwing stones at this huge rock, but if you keep hurling just maybe you can open up a crack,” Nakazora said in an interview at BNP’s Tokyo offices on the 42nd floor overlooking the nation’s parliament and Imperial Palace. “If Japan can’t get its finances under control, people are going to start questioning what exactly the difference between Japan and Greece is.”
Greek Bailout

The agreement of euro-area finance ministers last week to extend Greece’s bailout removed the threat of default, though uncertainties still exist around the accord and the nation remains a weight to the region, Nakazora said in a Feb. 27 report. Researching the creditworthiness of Japanese and overseas issuers, together with serving on two government panels including the finance ministry’s fiscal system council, leaves her with little time for sleep.

“I usually get home on average at about midnight, sometimes it can be 2 a.m.,” Nakazora said. “I get up at 5 a.m., so I don’t sleep much. It has been like that forever.”
Likes SoftBank

With unprecedented central bank stimulus compressing debt yields, Nakazora said she likes SoftBank Corp.’s bonds, which offer investors more than five times the average spread Japanese notes pay. She also recommends the debt of Tokyo Electric Power Co., operator of the tsunami-hit Fukushima power plant, but is no longer a fan of Sony Corp. debentures because the jury’s still out on whether the electronics maker can revive its fortunes.

Japan’s industrial strength, and the fact that local investors hold most of the country’s debt, distinguish it from Greece, she said. Still, Japan needs to break through the structures that give older voters more say and make it harder for politicians to reduce welfare payments, she said.

Prime Minister Shinzo Abe last year committed to achieving a primary balance surplus by fiscal 2020 despite delaying an increase in the nation’s sales tax. Forecasts prepared by the government’s Cabinet Office last month said he probably won’t achieve that goal even with nominal economic growth rates of more than 3 percent in the medium to long term.
Debt Ratio

Nakazora says she wasn’t in favor of the sales tax delay. Abe postponed raising the levy to 10 percent by 18 months in November after an increase to 8 percent from 5 percent in April plunged the economy into a recession. Japan’s debt will rise to the equivalent of 246 percent of GDP this year, one of the highest ratios in the world, the International Monetary Fund forecasts.

The finance ministry panel on which Nakazora sits and which focuses on budgetary rectitude was “dismayed” with the sales tax delay because it goes against the committee’s very purpose, she said. Takero Doi, a professor at Keio University in Tokyo who’s on the same committee, said Japan must raise its consumption tax to at least 15 percent or more by 2025, and 20 percent would be better, to have any chance of checking its bulging debt pile.

As Japan’s population ages, social security-related outlays will climb 79 percent compared with 2000, to 31.5 trillion yen in the year starting April, Ministry of Finance estimates show. Debt servicing costs will total 23.5 trillion yen, accounting for almost a quarter of all government spending.
Women’s Policies

Abe’s plans to revitalize the economy by increasing female participation in the workforce also lack detail, and haven’t gone down well with women, Nakazora said. Abe has encouraged publicly traded companies in Japan to have at least one female executive and has also set a goal of women holding 30 percent of leadership positions in all areas of society by 2020.

Nakazora spoke to about 200 working women late last year outside Tokyo and, when she asked how many of them liked Abe’s policies, no one in the room raised their hand. Nine said they disliked them, while the rest were indifferent, she said.

“The message to women is ‘Get out and work’ -- that’s how it looks,” Nakazora said. Most Japanese women are happy raising a family without working, while those who do want a job already have one. The policies Abe is advocating are unlikely to boost female employment much, she said.
‘She Saved Me’

Nakazora said her mother, who “lives about 20 seconds away,” has played a huge role in rearing her two teenage sons during her unforgiving weekdays. “My mother gave up so much for me,” Nakazora, who’s in her late 40s, said. “She saved me.”

Prior to joining BNP in 2008, Nakazora worked at JPMorgan Chase & Co. and Morgan Stanley in Tokyo as a credit analyst. She started her career in finance in 1991 as an economist at Nomura’s research institute, one of the first cadre of female hires under legislation banning employment discrimination based on gender. In a book she published on Europe’s recession in 2011, Nakazora thanked her parents, children and husband for their constant support.

A typical day last week saw two client meetings, a conference call, an interview with a Japanese magazine and a business dinner. She’d just returned from a two-day trip to southern and western Japan, was in Hokkaido in Japan’s north the week before and is working out of India this week.

Nakazora lists some of her best picks as recommending Japanese bank bonds during the nation’s financial crisis at the end of the 1990s, when she was just starting out at Nomura’s asset management unit.
Tepco Swaps

Her advice to invest in credit-default swaps of Tokyo Electric Power, or Tepco, after the Fukushima nuclear disaster in March 2011 has also paid off for investors. The swaps peaked at 1,762 basis points on Oct. 12, 2011, the day after she recommended the utility. The cost to insure the company’s debt against non-payment was 137 basis points on March 3, CMA prices show.

Nakazora’s research on the euro-area debt fallout and its impact for banks in the currency bloc have also marked her out among colleagues, according to Yusuke Ueda, a credit analyst at Bank of America Merrill Lynch in Tokyo. “Analysts must create their own niche, and in that sense, she has been amazing,” Ueda said.

Nakazora has written or co-authored several books on financial crises, including Europe’s government debt debacle and the U.S. subprime mess. In 2012, she published a guide on sovereign risk for university students that opens with a reminder that what happened in Greece could also happen at home.
‘Carry Weight’

She successfully pushed for the fiscal system council’s end-of-year report to include tougher language to recommend that the nation’s leaders study Greece’s dilemma, minutes of its meetings show.

“As a market participant, Nakazora’s comments carry weight,” said Keio University’s Doi. “She voices strong concerns if she thinks expenditure cuts aren’t sufficient.”

Nakazora says Abe’s economic program, coined Abenomics, has at least succeeded in shaking Japanese people out of their gloom. Even so, it’s done little to change fundamentals, spur growth or address the world’s second-largest debt per capita after Greece, she said.

Japan’s older generation, who possess most of the nation’s wealth, must ultimately pay more to reduce the debt pile so younger Japanese don’t lose the incentive to work, she said.

Nakazora herself has been coming into the office an hour later than usual for over a year after BNP human resources said her early starts put too much pressure on other staff.

“I’m not a perfectionist,” she said. “As a mother, sometimes things don’t work out at home, sometimes things don’t work at the office, but if I’m able to add the two up to 100 percent, that’s enough.”

To contact the reporters on this story: Finbarr Flynn in Tokyo at; Tesun Oh in Tokyo at

To contact the editors responsible for this story: Katrina Nicholas at Ken McCallum