Bond Yields Drop Even as Kan Fails to Heed Moody’s Warning: Japan Credit
Japan's Prime Minister Naoto Kan
Haruyoshi Yamaguchi/Bloomberg
Prime Minister Naoto Kan’s administration hasn’t specified a target year for increasing taxes to cut the world’s largest debt.
Prime Minister Naoto Kan’s administration hasn’t specified a target year for increasing taxes to cut the world’s largest debt. Photographer: Haruyoshi Yamaguchi/Bloomberg
Aug. 12 (Bloomberg) -- Kim Eng Tan, a Singapore-based analyst at Standard & Poor’s, speaks about the global economy, financial markets, and sovereign debt ratings. Tan speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)
When Moody’s Investors Service warned in May it may cut Japan’s credit rating, it said the government needed to generate economic growth and come up with a plan to reduce its deficits. So far, Japan hasn’t done either.
Prime Minister Naoto Kan’s administration hasn’t specified a target year for increasing taxes to cut the world’s largest debt. The government reduced its growth forecast today for this year by 66 percent, saying global economic uncertainty is among risks to the outlook. A Moody’s decision may come this month.
The possibility of a downgrade hasn’t increased borrowing costs in Japan, with 10-year government debt yielding 1.04 percent, the least among the 32 bond markets worldwide tracked by Bloomberg. In the U.S., the loss of the nation’s top credit score for the first time also pulled down Treasury yields to a record low as investors piled into bonds as a haven from the ensuing global stock rout.
“I see odds of more than 50 percent that Japan’s rating will be cut,” said Akio Kato, team leader for Japanese debt in Tokyo at Kokusai Asset Management Co., which runs the $30 billion Global Sovereign Open fund, the country’s biggest mutual fund. “It’s getting more uncertain that Japan’s economy will maintain momentum, as the yen appreciates to this degree and export demand is more likely to decline.”
Japan’s 10-year bond yield slid to 0.975 percent on Aug. 9, the lowest since November. That compared with 1.250 percent on Jan. 27 when Standard & Poor’s cut the nation’s credit rating for the first time in nine years.
Bond Returns
“The Japanese outlook is negative, and the main reason is because they have been through a very sharp recession,” Kim Eng Tan, a Singapore-based S&P analyst, said in an interview on Bloomberg Television. The negative outlook means there’s an “at least one in three” chance S&P will cut the rating, he said.
Japan’s bonds have returned investors 0.2 percent in August, set for a sixth monthly gain, according to an index compiled by Bank of America Merrill Lynch. Treasuries have returned 2 percent this month.
A Moody’s move would likely have little impact on Japanese bonds as 95 percent of the securities are held by domestic investors, said Tetsuya Inoue, chief researcher for financial markets at Tokyo-based Nomura Research Institute Ltd.
Japan has posted a current-account surplus each month since January 1985, except for four months. The surpluses allow the nation to finance itself without relying on foreign capital. The current account is the difference between total exports of goods, services and transfers, and imports of them.
“Bond yields wouldn’t surge” even if there’s a rating cut as long as that surplus remains, said Makoto Noji, a senior bond and currency strategist in Tokyo at SMBC Nikko Securities Inc.
Moody’s Warning
Moody’s put the nation’s Aa2 rating on review for a downgrade on May 31, saying that government debt will balloon “inexorably” without an effective strategy. Decisions on reviews are expected to be announced within three months, according to the rating company. Thomas Byrne, Moody’s senior vice president, sovereign risk, wasn’t immediately available to comment for this story.
Japan has the world’s biggest public debt, which is 23 percent larger than the U.S.’s, data compiled by Bloomberg show. The nation’s government debt increased to 943.8 trillion yen ($12.3 trillion) as of the end of June, the Finance Ministry said on Aug. 10.
The country’s export-reliant economic outlook has been clouded by slower-than-estimated U.S. growth and the yen’s approaching a postwar high. To stem the appreciation, Japan sold the currency last week for the third time in a year. Moody’s said on Aug. 8 that gains in the yen even after the intervention are “credit negative” for the nation’s “fragile” recovery.
Japan’s economy will grow 0.5 percent in the year started April 1, compared with a January forecast for a 1.5 percent expansion, the Cabinet Office said today. The Bank of Japan bolstered stimulus by 10 trillion yen on Aug. 4, the same day Japan intervened in the currency market for the first time since March after a record earthquake.
U.S. gross domestic product rose at a 1.3 percent annual rate following a 0.4 percent gain in the first quarter, the Commerce Department said last month. Economists had estimated a 1.8 percent increase.
Two-year Treasury yields slid to within four basis points of their Japanese equivalent today, the smallest spread since 1992, reducing the allure of dollar-denominated assets.
‘Equivocal’ Plan
The yen traded at 76.89 per dollar as of 12:20 p.m. in Tokyo, nearing the postwar record of 76.25 reached on March 17. A stronger local currency reduces the overseas earnings at Japanese companies when repatriated. It also makes Japanese-made products costlier outside the country.
Kan’s government modified a pledge to double the 5 percent sales tax by 2015 after some ruling party members objected to a specific deadline. The government will raise the levy to 10 percent by the “middle” of this decade, it said on June 30.
Japan will spend about 10 trillion yen in a third package to rebuild after a record earthquake in March, Katsuya Okada, secretary-general of the ruling Democratic Party of Japan, said July 27. The government will fund the extra budget with bonds that will be repaid with higher taxes, he said.
Still, the government’s “equivocal” wording for the schedule of a tax increase is a negative for Japan’s rating, said Kokusai’s Kato.
Credit-default swaps for Japanese debt, used to speculate on credit quality, rose this week. Five-year swaps climbed to 109 basis points yesterday, the most since March, according to data provider CMA, which is owned by CME Group Inc. and compiles prices in the privately negotiated market. A drop in price signals improved perceptions of creditworthiness, while an increase suggests the opposite.
“Japan will have to rely on overseas investors sometime in the future,” said Inoue, who worked for the BOJ for more than two decades before joining Nomura. “But if Japan’s rating is very low at that time, it’s troublesome.”
To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net
To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net
Rate this Page