Japan Yield Curve to Steepen as Kan Seeks Deflation End, Toyota Asset Says

Japan’s yield curve is likely to steepen as incoming Prime Minister Naoto Kan will seek to rein in borrowings and pressure the central bank to extend monetary easing to lift the economy out of deflation, according to Toyota Asset Management Co.

The new cabinet that’s scheduled to be formed as early as tomorrow will “have strong economic growth aspirations for a government that’s aiming for fiscal rehabilitation,” said Masaru Hamasaki, chief strategist at Toyota Asset Management. The yield curve -- the spread between similar-quality debt of different maturities -- is flattening for mid-term bonds and steepening toward long- and super long-term bonds, he said.

Five-year notes completed the biggest weekly gain since December on prospects Kan will continue to press the Bank of Japan to maintain monetary easing policies. Japan’s lower and upper houses of parliament on June 4 elected Kan as prime minister. Yoshihiko Noda, Vice Finance Minister, is expected to be named as finance minister, Kyodo News reported June 5.

The yield spread between bonds maturing in two and five years shrank two basis points to 22 points as of 1:05 p.m. in Tokyo, the least since October 2008, according to data compiled by Bloomberg. The spread between 5- and 20-year bonds was at 160 basis points, near a two-week high. A basis point is 0.01 percentage point.

Yields on two-year bonds tend to follow changes in monetary policy rates while debt maturing in 10 years or longer is more prone to the influence of expectations for inflation and government borrowing levels.

Inflation Target

Then-Finance Minister Kan said April 20 that the central bank and government should work toward pushing inflation as high as 2 percent and reiterated his hope for an end to consumer price declines this year.

Kan’s cabinet will likely aim to improve the government’s finances and seek a weaker yen, Hamasaki said. Such policies may drive up shares and bring down yields, he said.

“Concerns over fiscal risk will ease in the next several months” now that Kan has been picked to head the government, Hamasaki said.

The Organization for Economic Cooperation and Development says Japan’s debt is approaching 200 percent of gross domestic product, the highest among its 31 members. Standard & Poor’s cut its outlook for Japan’s AA debt rating in January.

To contact the reporter on this story: Saburo Funabiki in Tokyo at sfunabiki@bloomberg.net.

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