Japan Yields May Reach 1.3% on New Issuances to Fund Spending, Mizuho Says

Japan’s bonds may fall, pushing 10- year yields to the highest since May, on speculation the ruling party will increase debt sales to help pay for economic-stimulus measures, according to Mizuho Securities Co.

The opposition Liberal Democratic Party and the New Komeito have separately proposed the nation sell more than 1 trillion yen ($11.8 billion) of so-called construction bonds for a supplementary budget this fiscal year. The ruling Democratic Party of Japan may be pressured to agree with the plan after it failed to secure an upper-house majority in a July election.

“The opposition will see it as a political victory to have the DPJ accept the issuance of construction bonds,” Yasunari Ueno, chief market economist at Tokyo-based Mizuho, said in an interview this week. “We have to take into account the risk of a swelling supplementary budget.”

The yield on the benchmark 10-year bond slid one basis point to 1.005 percent today. Ueno said the yield may climb to as high as 1.3 percent if the DPJ agrees with the opposition’s proposals and increases the supplementary budget. The last time the yield was at 1.3 percent was May 18.

Prime Minister Naoto Kan has said he is considering additional stimulus steps including a extra budget after unveiling a 915 billion yen economic package earlier this month. On Sept. 21, Chief Cabinet Secretary Yoshito Sengoku said the government will seek the cooperation of opposition parties should it decide to formulate an additional budget.

This month, the LDP and Komeito proposed selling 1.03 trillion yen and 1.5 trillion yen of bonds, respectively. Construction bonds refer to government bonds to mainly finance public works, the Komeito said in a statement dated Sept. 3.

Budget Plan

The ruling DPJ has 106 seats in the parliament’s upper house, less than half of the total 242, according to the DPJ’s website. The LDP and Komeito have 102 seats in total. The ruling party controls the majority of the lower house.

“Even if the upper house rejects a budget plan, it can still be legislated as long as the plan passes the lower house because of the lower house’s supremacy stipulated by the constitution,” said Mizuho’s Ueno. “But, a slew of laws that are necessary to execute the budget can’t be legislated” with the opposition parties controlling the upper house, he said.

The cabinet can propose an extra budget to parliament when an emergency expenditure is needed after the budget is created, the law states. Japan’s fiscal year ends March 31.

Japan’s economy grew at an annualized 0.4 percent in the three months ended June 30, the slowest pace in three quarters, a government report showed on Aug. 16.

To contact the reporters on this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net; Yumi Ikeda in Tokyo at yikeda4@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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