JGBs Signal Economy Rebound as Tankan Points to Contraction: Japan Credit
Tankan Points to GDP Drop as Bonds Signal Rebound
Tomohiro Ohsumi/Bloomberg
A man cycles past the Bank of Japan headquarters in Tokyo.
A man cycles past the Bank of Japan headquarters in Tokyo. Photographer: Tomohiro Ohsumi/Bloomberg
Japanese bond yields are rising the most since June 2008 as traders look toward faster global growth just when the nation’s economy shows signs of starting to contract.
The Bank of Japan’s December Tankan report will show an index of sentiment among large manufacturers dropped for the first time in seven quarters, sliding to 3 from 8 in September, according to the median forecast of 20 economists in a Bloomberg News survey before tomorrow’s announcement. Data for October showed industrial output fell by the most since February 2009, export growth slowed and the jobless rate rose.
At the same time, three-month euroyen futures rates for September delivery, which indicate investor expectations for interest rates, touched 0.42 percent on Dec. 9, the most since April, and 10-year government bond yields were at 1.24 percent today, near last week’s six-month high of 1.27 percent. The mismatch shows growing conflict between investors dumping bonds and analysts and executives concerned Japan’s year-long recovery may end.
“There’s no evidence that Japan’s economy is gaining strong momentum at the moment,” said Jun Fukashiro, who helps oversee about $18 billion as chief fund manager at Toyota Asset Management Co. “The current wave of selling in Japan’s short- term market can’t be justified as deflation is persisting and corporate sentiment is starting to dwindle.”
Yields on Japanese government bonds have climbed 31 basis points this quarter, setting for the biggest quarterly increase since June 2008 on optimism about a global recovery. The 1.2 percent 10-year bond due Dec. 20, 2020 was unchanged at 1.24 percent today, according to Bloomberg data.
Lost 2.1 Percent
Investors in Japanese government bonds lost 2.1 percent since Sept. 30, while those who bought Treasuries lost 2.7 percent, according to indexes compiled by Bank of America Merrill Lynch.
Euroyen contracts for September delivery fell the last three months, lifting the implied yield by 15.5 basis points, or 0.15 percentage point, to 0.405 percent today from a five-year low of 0.255 percent in August.
The advance in rates was partly because of selling by Japanese banks that suffered losses on Treasuries holdings, said Shinsuke Kanabu, a project and research director at Tokyo-based money market dealer Central Tanshi Co.
‘No Double-Dip’
“People are expecting there will be no double-dip recession,” said Shinji Hiramatsu, senior investment manager in Tokyo at Sompo Japan Nipponkoa Asset Management Co. Ltd. which oversees about 1.5 trillion yen. “China is picking up and the U.S. is getting better, so people are expecting Japan could be next.”
China’s industrial-output growth accelerated to a 13.3 percent annual pace in November, while retail sales rose almost 19 percent. U.S. gross domestic product will expand 2.6 percent in 2011, more than the 1.4 percent predicted for the euro region and the 1.4 percent forecast for Japan, according to the median estimate of at least 15 economists in Bloomberg surveys.
Japan’s economy may shrink this quarter as Prime Minister Naoto Kan’s stimulus spending fades, the government-affiliated Economic Planning Association said last week, citing forecasts from economists. Exports rose 7.8 percent in October, the slowest pace this year, while industrial production fell for a fifth month and the unemployment rate climbed to 5.1 percent.
Capital Outlays
The Tankan may show that companies’ forecasts for capital outlays this year have increased. Large companies aim to boost spending by 2.7 percent in the year ending March 31, more than the 2.4 percent planned three months ago, according to the Bloomberg News survey.
The rise in yields on euroyen futures is impeding the Bank of Japan’s efforts to spur the economy through asset purchases by driving up borrowing costs.
The Bank of Japan seeks to bolster growth with 35 trillion yen ($419 billion) of asset purchases. The bank also cut its target rate to as low as zero in October and introduced a 5 trillion-yen fund to buy bonds and assets including exchange- traded funds and real-estate investment trusts, aiming to add money to the economy.
Japan’s economy expanded at an annual 4.5 percent rate in the three months ended Sept. 30, the Cabinet Office said Dec. 9. In dollar terms, the $3.96 trillion economy, which returned to growth at the end of last year, remained larger than China’s $3.95 trillion economy in the first nine months of 2010, the Cabinet Office said.
The BOJ’s plans have driven up prices for assets targeted by the central bank’s fund, including company bonds rated BBB or higher and real estate investment trusts.
Corporate Yields
The extra yield investors demand to hold five-year corporate bonds rated BBB over government notes of similar maturity narrowed to 106 basis points yesterday from 121 on Oct. 5, when the BOJ announced the asset-purchase program.
The Tokyo Stock Exchange REIT Index has advanced 14 percent since Oct. 5. Japan’s central bank plans to buy 50 billion yen of REITs.
Goldman Sachs Group Inc. forecasts the BOJ will need to expand stimulus measures to boost the economy even as the yen’s decline helps exporters. The yen has dropped 4 percent against the dollar from a 15-year high of 80.22 reached Nov. 1.
“The BOJ is going to keep its cautious stance because we know the yen is not getting stronger but at the same time we also notice the economy is getting worse,” said Chiwoong Lee, senior economist at Goldman Sachs in Tokyo. “So, I am betting the BOJ is going to keep its easy stance. We are actually expecting more additional easing in February.”
90 Per Dollar
The yen will trade at 90 per dollar by the end of 2011, according to the median forecast in a Bloomberg survey of 32 analysts.
Bonds designed to protect investors against inflation show money managers in Japan anticipate prices will decline over the next five years. The difference between yields on five-year Japanese government notes and inflation-linked debt widened by one basis point today to minus 0.68 percent.
The cost to protect Japanese government debt against non- payment for five years with credit-default swaps was at 69.85 basis points yesterday, declining from 73.68 points on Nov. 30, CMA prices in New York show. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.
To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net;
To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net
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