Man Who Saw 0.5% 10-Year Yield Now Predicts 0.25%: Japan Credit

Source: Tokai Tokyo Securities Co.

Kazuhiko Sano, chief bond strategist of Tokai Tokyo Securities Co., has been a bond analyst since 1988 and joined Tokai Tokyo from Citigroup Inc. in 2010. Sano predicts yields will slide as the Bank of Japan misses its 2 percent inflation target while a planned April increase in the sales tax curtails spending. Close

Kazuhiko Sano, chief bond strategist of Tokai Tokyo Securities Co., has been a bond... Read More

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Source: Tokai Tokyo Securities Co.

Kazuhiko Sano, chief bond strategist of Tokai Tokyo Securities Co., has been a bond analyst since 1988 and joined Tokai Tokyo from Citigroup Inc. in 2010. Sano predicts yields will slide as the Bank of Japan misses its 2 percent inflation target while a planned April increase in the sales tax curtails spending.

The strategist who predicted Japan’s 10-year bond yield would plunge to 0.5 percent now says it’s likely to reach a record 0.25 percent as a failure to meet economic targets may cost Prime Minister Shinzo Abe his job.

The benchmark Japanese government bond yield may slide to that level in the year starting next April from 0.765 percent today, said Kazuhiko Sano, the chief bond strategist at Tokai Tokyo Securities Co. When the rate was at 0.85 percent in May 2012, he forecast it would reach 0.5 percent this fiscal year, presaging its drop to 0.315 percent on April 5.

Japan’s main stock index has jumped 34 percent this year since Abe came to power on a platform of increased fiscal and monetary stimulus. Even as investors chased higher-yielding assets, an unprecedented bond-buying campaign by the Bank of Japan has capped yields at the lowest in the world.

“We’ll be in a low-yield environment next fiscal year because the economy is bad,” said Tokyo-based Sano, 51, whose company is one of the 23 primary dealers obliged to bid at government bond sales. “Once growth slows, approval ratings for Abe may fall, and it’s possible a change of the administration will occur, while a failure to meet the inflation target may call the effectiveness of the BOJ’s quantitative easing into question.”

Sano, who has been a bond analyst since 1988 and joined Tokai Tokyo from Citigroup Inc. in 2010, predicts yields will slide as the BOJ misses its 2 percent inflation target while a planned April increase in the sales tax curtails spending.

Analyst Outsider

That makes him an outsider among JGB analysts, who see the benchmark yields rising to about 1 percent and holding there throughout fiscal 2014, according to median estimates compiled by Bloomberg.

“I can’t totally rule out the possibility” that the 10-year yield will touch 0.25 percent, said Shinji Hiramatsu, a senior investment manager in Tokyo at Sompo Japan Nipponkoa Asset Management Co., which oversees the equivalent of $9.4 billion. But, he added, “there would be very few incentives for investors to buy 10-year notes yielding only 0.25 percent.”

Sano said he sees about an even chance that the 10-year yield will reach 0.25 percent next fiscal year. The level is about equivalent to what banks pay for three-month dollar loans and what investors get when holding two-year German notes. Should Japan’s 10-year yield reach that level by March 2015, the end of fiscal 2014, investors who bought the securities yesterday would get a 5.1 percent return, Bloomberg data show.

Economic Prospects

“It’s unimaginable that Japan’s economy will continue to grow amid a declining population and a weakening aspiration among individuals for higher income,” Sano said.

Japan’s population decreased 0.21 percent to 126.4 million as of the end of March from a year earlier, the fourth year of drops, according to a government survey released last month. The nation’s economy will probably grow 1.5 percent in 2014 after expanding 1.9 percent this year, according to the median estimate of economists surveyed by Bloomberg News.

A 2.2 trillion yen ($22 billion) sale of 10-year bond sales yesterday drew bids valued at 3.5 times the amount available, compared with an average of 3.25 for the preceding 10 auctions, Ministry of Finance data shows.

The median estimate of 10 analysts polled by Bloomberg shows the 10-year yield may rise to 1.03 percent in the quarter ending March 2015. Itochu Corp.’s Yoshimasa Maruyama is the most bearish on JGBs among those forecasters, expecting the yield to reach 2 percent, a level unseen for seven years.

Deflation Exit

“That’s a reasonable level when Japan emerges from deflation,” said Maruyama, the Tokyo-based chief economist at Itochu. “Reaching 2 percent inflation within two years would be difficult, but I do think the CPI will rise to around 1 percent stably,” he said, referring to the consumer price index.

Elsewhere in Japan’s credit markets, Mitsubishi Corp. sold 30 billion yen of 15-year, 1.485 percent bonds, according to a statement yesterday from Mitsubishi UFJ Morgan Stanley Securities Co. The nation’s largest trading house last sold 10-year debt paying 1.022 percent in May 2012, according to data compiled by Bloomberg.

Japanese corporate notes have handed investors a 0.16 percent gain since the end of July, compared with a 0.26 percent return on sovereign securities, according to Bank of America Merrill Lynch index data. Company bonds worldwide lost 0.89 percent during the period.

Rising Prices

Nationwide consumer prices excluding fresh food, a policy target for the BOJ, climbed 0.7 percent in July from a year earlier, the biggest gain since November 2008 and compared with the average of a 0.3 percent monthly decline in the previous five years. The core CPI gauge will probably advance 1.3 percent next fiscal year, excluding the effects of a planned sales-tax increase, BOJ board members forecast in July.

Japan is due to raise the nation’s 5 percent sales tax to 8 percent in April and to 10 percent in October 2015 to curb the world’s heaviest debt load. Economy Minister Akira Amari said yesterday Abe will decide whether to go ahead with the plan after the Oct. 1 release of the BOJ’s quarterly Tankan survey of business confidence.

“While the government is likely to roll out various stimulus measures to sustain growth into 2014, the economy will deteriorate significantly in the second half as the sales tax and fiscal tightening weigh on growth,” said Takuji Okubo, the chief economist at Japan Macro Advisors in Tokyo. He agrees with Tokai’s Sano that benchmark yields are more likely to fall.

Abe’s Liberal Democratic Party took control of both chambers of parliament on July 21 with its victory in upper-house elections. His cabinet’s approval rating rose to 68 percent last month from 63 percent in July, according to a Nikkei newspaper poll conducted on Aug. 23-25.

Abe ‘Tailwind’

Public support for Abe’s administration is a “tailwind” for the planned tax hike, said Shuntaro Take, the deputy general manager for corporate accounting and investment at Tokio Marine & Nichido Life Insurance Co., which manages about $39 billion in Tokyo. “A failure to raise the sales tax would elicit a substantial negative response from the JGB market amid concern about Japan’s finances.”

Finance Minister Taro Aso has said the nation’s mid-term fiscal plan will be submitted at a meeting of Group of 20 nations in St. Petersburg this week. Japan’s debt will grow to 245 percent of its economic output this year, the highest ratio globally, according to the International Monetary Fund.

Economic Recovery

Japan’s economic recovery is strong enough to weather an increase in the sales levy, former Ministry of Finance official Eisuke Sakakibara said in an interview yesterday. He expects economic growth of 2 percent or more both this year and next.

Postponing an increase in the tax would have a large and negative impact on Japan’s financial markets, said 22 of 32 economists in a Bloomberg survey.

The yen has slumped 13 percent against the dollar this year as the BOJ pumped more than 7 trillion yen into the economy through monthly bond purchases. The Topix index of Japanese shares rose 0.3 percent as of 1:42 p.m., after jumping 2.8 percent yesterday, the most since Aug. 2.

“Market participants basically don’t believe that the BOJ will achieve its inflation target, but they still make bets based on expectations of its success,” said Sano. “Once this assumption collapses, each financial market will reverse its direction.”

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@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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