Jan. 4 (Bloomberg) — Japan’s Prime Minister, Yukio Hatoyama, swept to power by a public seeking an end to economic and political stagnation, is failing to arrest the nation’s decline.

Japanese gross domestic product shrank to an annualized 471 trillion yen ($5 trillion) in the third quarter, without accounting for changes in prices, the lowest level since 1991. The tumble is unprecedented among the biggest economies since the 1930s, according to Paul Sheard, global chief economist at Nomura Securities International Inc. in New York. As a result of the contraction, the Finance Ministry projects tax revenue this year will drop to a quarter-century low.

Hatoyama’s 2010 budget, released Dec. 25, does nothing to rein in record deficits that threaten Japan’s Aa2 rating, said Carl Weinberg, chief economist at High Frequency Economics. It avoided consumption-tax increases or deregulation to boost productivity; without policy changes, deflation and a shrinking population risk eroding the savings pool restraining Japan’s bond yields.

“Japan’s fiscal conditions are close to a melting point,” said Takeshi Fujimaki, a former adviser to billionaire investor George Soros and now president of Fujimaki Japan, an investment advising company in Tokyo. “My biggest concern is whether the Japanese government will be able to sell all the bonds at auctions,” he said, adding that such failures might send 10- year note yields climbing through 2.4 percent.

Yield Comparison

Japan’s benchmark 10-year notes dropped the most in almost two months today, sending the yield up to 1.32 percent, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. The yield is about 2.5 percentage points lower than comparable Treasuries, even while Japanese debt is larger than America’s.

Auction difficulties may begin in the next fiscal year, which starts April 1, Fujimaki said. The “tipping point” for Japan’s bond market will come later, in about five years, said Atsushi Nakajima, chief economist in Tokyo at Mizuho Research Institute, a unit of the nation’s biggest bank.

For now, investors are signaling confidence in Japan’s ability to pay its $8.96 trillion of government bonds, or JGBs – - a total that exceeds the $8.78 trillion of U.S. federal debt, according to June figures from the Bank for International Settlements in Basel, Switzerland, which serves as a bank for central banks.

Bond Auctions

Bids for the most recent auction of Japanese 10-year notes, on Dec. 1, exceeded the amount on offer by 2.81 times. The lure for domestic investors is that falling consumer prices mean so- called real yields — at about 3 percent for 10-year securities — are higher than the 2 percent%

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 Japan Return to ’91 GDP Gives Market Mega Risk Crisis (Update2) – Bloomberg.com.