Romney Weakens Yen as Fed View Widens U.S.-JGB Gap: Japan Credit

Presidential Candidate Mitt Romney’s criticism of U.S. monetary easing is helping drive Treasury yields higher relative to Japan’s, weakening the yen.

The extra yield investors demand to hold two-year Treasuries instead of similar-maturity Japanese notes climbed to 21 basis points on Oct. 25, the highest since April 5, data compiled by Bloomberg show. A similar gap between the U.S. notes and German bunds rose to an eight-week high of 26 basis points.

The yen slid to a four-month low last week on prospects the Bank of Japan (8301) will ease policy, after the Federal Reserve unveiled a third round of so-called quantitative easing last month. The BOJ increased asset purchases today. Romney’s pledge to replace Fed Chairman Ben S. Bernanke when his term expires in January 2014 is helping push Treasury yields higher, drawing funds into dollar assets, according to Sumitomo Mitsui Trust Bank Ltd. and Daiwa Securities Co.

“The market has started to price in the possibility that Romney will win the election and U.S. monetary easing will be terminated earlier than planned,” said Yoshitsugu Fujita, assistant vice-president of global markets in New York at Sumitomo Mitsui Trust. “Such speculation is lending support to the dollar against the yen.”

Two-year Treasury yields have gained 10 basis points to 0.29 percent since reaching a 10-month low on July 23. The two- year rate in Japan has been little changed at 0.1 percent during the period, almost matching what banks charge each other for overnight lending in money markets. The yield gap between the two countries was at 19 basis points today.

BOJ Easing

The yen depreciated to 80.38 per dollar on Oct. 26, the weakest since June 25, and is poised for a 2.1 percent decline in October, the biggest monthly slide since March. The currency traded at 79.33 as of 3:08 p.m. in Tokyo, up 0.6 percent from yesterday’s close, after the BOJ expanded its asset-purchase fund by 11 trillion yen ($139 billion) to 66 trillion yen.

It was the second monetary easing by the central bank in two months. The BOJ will increase buying of Japanese government bonds and Treasury bills by 5 trillion yen each, the central bank said in a statement today.

The yen’s rate is still stronger than the 82 level at which Japanese exporters say they can break even, according to an annual government survey released in February. Honda Motor Co., the nation’s third-largest automaker, yesterday joined Nintendo Co. and Sony Corp. in citing the strong yen when cutting earnings forecasts.

‘Neutral Range’

Nissan Motor Co. Chief Executive Officer Carlos Ghosn said his company may have to move away from Japan to survive as the strong yen diminishes the nation’s competitiveness.

“If the exchange rate is high, we move out,” Ghosn said in Tokyo today. The yen’s “neutral range” is 100 to the dollar, he said.

Elsewhere in Japan’s credit markets, Mori Hills REIT Investment Corp. hired banks for a sale of three-year and five- year notes, according to a statement yesterday from SMBC Nikko Securities Inc., which will manage the offering together with Mitsubishi UFJ Morgan Stanley Securities Co. and Mizuho Financial Group Inc.

The Treasury of New South Wales registered to sell as much as 300 billion yen of Samurai bonds, according to a filing with Japan’s Finance Ministry. The registration takes effect Nov. 6 and is valid for two years.

Japanese corporate bonds have handed investors a 1.43 percent return this year, according to Bank of America Merrill Lynch index data. Samurai notes, which are yen-denominated securities sold in Japan by overseas borrowers, gained 4.25 percent while company debt worldwide returned 10 percent, according to the data.

Industrial Slump

Japan’s industrial production fell the most since last year’s earthquake and tsunami, data showed today, bolstering the case for the central bank to add to easing. Output declined 4.1 percent in September from the previous month, when it dropped 1.6 percent, the Trade Ministry said in Tokyo. The drop exceeded all forecasts in a Bloomberg News survey of economists. A separate report showed unemployment unchanged.

The yen has depreciated 5.2 percent this year, the most among peers in Bloomberg Correlation-Weighted Currency Indexes. Record overseas acquisitions by Japanese companies including Softbank Corp. and Marubeni Corp. have helped drive the currency lower. Domestic corporations sold yen to make $103 billion in overseas mergers and acquisitions this year, the most in Bloomberg data going back to 1987 and 13 percent above the $91.3 billion total for 2011.

Money Printing

Softbank, Japan’s No. 3 mobile phone company, agreed Oct. 15 to buy a 70 percent stake in Sprint Nextel Corp. of Overland Park, Kansas, for $20.1 billion. Marubeni said in May it would purchase Gavilon Group LLC, the third-largest U.S. grain merchandiser based in Nebraska, for $3.6 billion.

Romney has said that printing more money comes at a higher cost than its intended benefits to the economy. The Republican candidate has pledged to cut corporate and individual taxes, while Obama said on Oct. 25 that his rival’s plan has been tried before, and “it didn’t work.”

A Gallup poll of registered voters released Oct. 26 showed the race between Obama and Romney in a dead heat. The poll of about 3,050, which has a margin of error of two percentage points, showed 48 percent of respondents would vote for Obama and 48 percent for Romney if the election were held that day. The election is on Nov. 6.

Presidential Returns

Returns on U.S. fixed-income assets have averaged 6.5 percent throughout Obama’s term, surpassing the 4.6 percent during the previous four years under George W. Bush, according to Bank of America Merrill Lynch indexes.

The Fed unveiled a plan on Sept. 13 to buy $40 billion of mortgage debt every month in a third round of quantitative easing, or QE, after $2.3 trillion purchases of bonds from December 2008 and June 2011.

“Tax reductions by Romney are seen as being stimulative for the economy,” said Yuji Kameoka, chief currency strategist at Daiwa Securities in Tokyo, Japan’s second-biggest brokerage. “I expect those measures to generate expectations for higher Treasury yields and a stronger dollar.”

Bernanke is unlikely to seek another term even if Obama is re-elected, according to a person close to the chairman who declined to be identified.

Japan’s benchmark 10-year note yield slid one basis point to 0.76 percent today, near the nine-year low of 0.72 percent reached July 23. Bond futures reached as high as 144.36, the most since Aug. 7. The central bank buys securities ranging from government bonds to corporate debt to real-estate investment trusts to achieve a 1 percent annual goal.

Asset Purchases

The BOJ’s monetary easing has so far had a limited effect on the yen as the central bank has trailed the Fed in injecting funds into the economy. The BOJ’s holdings of assets acquired through monetary easing have increased by 44 trillion yen, or $553 billion, since the beginning of U.S. quantitative easing.

All but one of 27 economists surveyed by Bloomberg News had expected the BOJ to increase asset purchases at its policy meeting today. The so-called core inflation rate excluding fresh food has never been above 1 percent for more than a year since 1993.

“People in the currency market are measuring the central banks’ willingness for monetary easing by their balance sheets,” said Daisaku Ueno, a senior foreign-exchange and fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo, a unit of Japan’s biggest financial group by market value. “A Romney win will cause the dollar to appreciate against the yen by encouraging anti-QE3 sentiment within a strengthened Republican Party.”

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Shigeki Nozawa in Tokyo at snozawa1@bloomberg.net

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

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