Kuroda Stimulus Backfires as Mortgage Costs Rise: Japan Credit
Stock Chart for Bank of Japan/The (8301)
While 35-year home-loan costs rose one basis point to 1.81 percent this month from an all-time low of 1.8 percent in April, any increase will be undesirable for the BOJ, according to Mizuho Securities Co. Federal Reserve Chairman Ben S. Bernanke’s monetary easing almost halved 30-year U.S. mortgage rates since 2008 to 3.35 percent on May 2.
The BOJ’s April 4 announcement that it would double bond buying to generate 2 percent inflation unleashed the highest government-debt volatility in a decade and pushed 10-year yields up by 4 1/2 basis points. The benchmark lending rate for large corporations, known as the prime rate, increased five basis points from its record low to 1.2 percent on April 10, despite the BOJ’s aim of stoking the economy through cheaper funding.
“It makes little economic sense for rates to decline when the BOJ says it will raise consumer prices,” said Toru Suehiro, a market economist in Tokyo at Mizuho, one of the 24 primary dealers obliged to bid at government debt auctions. “Yields are higher than before the monetary easing to reflect the volatility risk, and lending rates have risen because they are set based on bond yields.”
Volatility, as measured by the gap between the 10-year yield’s daily high and low, jumped to 30 1/2 basis points on April 5, the most since July 2003, after Kuroda unveiled a plan to buy more than 7 trillion yen ($70.7 billion) of Japanese government bonds a month, accounting for more than half of the total amount that the government plans to sell in the market this fiscal year.
“The BOJ’s buying is reducing the liquidity of government bonds, preventing market participants from finding appropriate yield levels,” said Satoshi Okagawa, a senior global-markets analyst in Singapore at Sumitomo Mitsui Banking Corp., a unit of Japan’s second-largest financial group by market value. “That situation will make the market dependent on the BOJ’s purchases just like a morphine addict.”
The 35-year mortgage rate in Japan was at 2.92 percent in August 2008, according to data compiled by the Japan Housing Finance Agency, the month before the collapse of Lehman Brothers Holdings Inc. that froze global credit markets. The prime rate was at 2.25 percent at that time, figures from Mizuho Corporate Bank Ltd. show.
Japan’s 10-year bond yield was at 0.595 percent today, compared with 0.55 percent on April 3. The average U.S. 30-year mortgage rate was at 6.4 percent in August 2008, based on a Freddie Mac survey of 125 lenders.
Elsewhere in Japan’s credit markets, Mitsubishi Materials Corp. and Asahi Glass Co. hired banks for bond sales. Mitsubishi Materials hired Daiwa Securities Group Inc. and Mitsubishi UFJ Morgan Stanley Securities Co. for an offering of five-year notes, while Asahi Glass hired Daiwa, Mitsubishi UFJ Morgan Stanley and Nomura Holdings Inc., according to separate statements yesterday from Mitsubishi UFJ Morgan Stanley and Nomura.
Odakyu Electric Railway Co. registered to sell as much as 120 billion yen of debt, according to a filing with Japan’s Ministry of Finance. The Tokyo-based passenger rail operator offered three-year, 0.22 percent notes in January, according to data compiled by Bloomberg.
The extra yield that investors demand to hold Japanese corporate bonds rather than sovereign debt was at 37 basis points yesterday after falling to 36 on May 6, the lowest since August 2011, according to Bank of America Merrill Lynch index data. The spread for company notes worldwide was at 136 basis points, or 1.36 percentage points, the data showed.
The yen traded at 98.97 per dollar at 3:04 p.m. in Tokyo, 1 percent from the four-year low of 99.95 reached last month in the wake of the BOJ’s easing. It has weakened more than 11 percent this year, the most among the 10 developed-market currencies tracked by the Bloomberg Correlation Weighted Indexes.
The BOJ forecast on April 26 that Japan’s gross domestic product will expand 2.9 percent in the year ending March 31 while consumer prices excluding fresh food will rise 0.7 percent during the period. The central bank’s asset purchases will raise expectations for price gains, lowering inflation-adjusted interest rates and providing “stimulative effects” on private demand, the BOJ said in a statement.
Japan’s real GDP stagnated in the October-December period, and the so-called core-inflation rate in Tokyo fell for four straight years though April, when it slid 0.3 percent from a year earlier. In contrast, housing starts advanced for a seventh month in March, increasing 7.3 percent from a year earlier, according to government figures.
Further housing demand hinges on the BOJ’s ability to keep borrowing costs lower and whether household incomes will gain. Economy Minister Akira Amari said on May 4 that wages need to rise in Japan to spur inflation, while Prime Minister Shinzo Abe has urged companies to consider increasing salaries.
Minutes of the BOJ’s April 3-4 meeting showed some board members said a “great opportunity” existed to overcome deflation. A few members said that while wages of full-time employees are starting to increase in some big companies, more time is needed for a broader range of workers to see raises.
An index for Japanese wages rose for a second month in March after falling in January to the lowest level since 1992, figures from the labor ministry show.
“I expect the BOJ to maintain its stance of supporting the economy” by keeping a lid on yields, said Yasuhide Yajima, the chief economist at NLI Research Institute Ltd. in Tokyo, an affiliate of Nippon Life Insurance Co., Japan’s biggest life insurer. “Yields won’t rise at least until summer because 10-year rates are affected by both inflation expectations and purchases” by investors driven by the BOJ’s bond buying, he said.
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