BOJ Stimulus Bets Drive Yields to 9-Month Lows: Japan Credit

BOJ Stimulus Bets Drive Yields to 8-Month Lows
A pedestrian walks past the Bank of Japan headquarters in Tokyo. Photographer: Kiyoshi Ota/Bloomberg

Five-year Japanese bond yields are trading at an almost nine-month low as the yen approaches a post World War II record high, fueling speculation the Bank of Japan will expand stimulus this week to support the economy.

Yields on Japan’s five-year government notes, which are more sensitive to changes in monetary policy than longer-term bonds, fell to 0.34 percent, the lowest since Nov. 12. U.S. five-year yields dropped to 1.18 percent, the least since November. The yen climbed to 76.30 against the dollar on Aug. 1, its strongest since a postwar record of 76.25 on March 17.

The BOJ may move to ensure that the appreciating yen doesn’t damp exports and derail the economy’s recovery from the March earthquake and tsunami. Five of 14 economists surveyed by Bloomberg News said the central bank will increase monetary stimulus at its Aug. 4-5 meeting, while two said there’s a possibility of it and seven said it will probably stand pat.

“The BOJ will likely announce an easing measure as soon as possible this time to respond to the strong yen and weak dollar caused by the U.S.’s slowing economy and worsening financial conditions,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo and a former BOJ official. “The Japanese economy has become less resilient to a stronger yen as competition from Asian companies has become more severe.”

The central bank may provide further monetary stimulus this week, the Nikkei newspaper reported yesterday without citing a source for the information. Japanese officials are also preparing to sell the yen, the report said.

Strength of Yen

Japanese Finance Minister Yoshihiko Noda said yesterday the yen was “overvalued” and that he’s watching the markets, while declining to comment on intervention.

Toyota Motor Corp. “can’t keep up with the speed of the yen’s rise,” Takahiko Ijichi, senior managing officer at the world’s largest carmaker, said yesterday. The yen’s gains cut Toyota’s first-quarter operating profit by 50 billion yen ($647 million), the company said. Every 1 yen gain against the dollar cuts Toyota’s operating profit by 34 billion yen, according to the company’s full-year outlook.

Amid speculation of a BOJ move this week, the benchmark 10-year government bond yield fell to 1.01 percent, the lowest since November. One-year discount bills have yielded 0.11 percent since July 14, barely above the BOJ’s overnight call loan rate target between zero percent and 0.1 percent, in another sign of the market’s expectation of easing.

Relative Returns

Government bonds returned 1.4 percent in the past three months in Japan, compared with 3.9 percent in the U.S. and 5.3 percent in Germany, according to indexes compiled by Bank of America Merrill Lynch.

Of the five economists predicting a BOJ move this week, two expect it to raise the asset-purchase program by 5 trillion yen ($65 billion) from the current 10 trillion yen this week, one projects a 10 trillion yen increase, and two didn’t predict the amount, according to a Bloomberg survey. The BOJ buys assets such as government debt, corporate bonds and real-estate investment trusts to inject money into the economy.

The central bank may increase the amount of government bonds it buys as part of the program, said Kazuhiko Sano, chief strategist at Tokai Tokyo Securities Co., one of the 25 primary dealers obliged to bid at government debt sales.

“If the BOJ lengthens the maturity of government debt it buys in the fund, that may help push down yields on medium to long-term government bonds,” said Sano, who expects the BOJ to expand the fund this week, without predicting the amount.

Yield Forecast

The 10-year bond yield may fall to 0.9 percent as the yen rises to a record, Sano said.

The BOJ buys government debt with a remaining maturity of between one and two years, in addition to discount bills, which mature in one year or less. It plans to buy up to about 5 trillion yen of government bonds and bills.

BOJ Governor Masaaki Shirakawa said last week that the yen’s strengthening could hurt Japan’s economy. Board member Hidetoshi Kamezaki said the bank would need to act “proactively” should the yen’s gains pose a threat to growth.

Japan’s industrial production rose a less-than-expected 3.9 percent in June from May, a government report last week showed. The world’s third-largest economy will probably expand in the third and fourth quarters after shrinking for three straight quarters, according to a survey of 41 economists by the government-affiliated Economic Planning Association.

Before three out of the last five BOJ monetary easing decisions since December 2009, the yen strengthened more than 2 percent in the preceding month, according to data compiled by Bloomberg. The yen has gained more than 3 percent since the BOJ’s last meeting on July 11-12.

Many Factors

The BOJ may expand its asset fund by 5 trillion yen if there’s a sharp increase in the yen, stocks fall, economic conditions worsen or deflation concerns mount, said Mari Iwashita, chief market economist at SMBC Nikko Securities Inc.

The Nikkei 225 Stock Average has fallen 5.9 percent so far this year. It’s recovered about 17 percent from its low on March 15 right after the magnitude-9 quake in northeastern Japan.

Central bankers may hold off from boosting stimulus this week as it takes a “wait-and-see stance,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo.

“The BOJ may not have changed its economic view that the economy is picking up with an easing of supply-chain constraints,” he said.

With weak economic signs coming out of the U.S. including the Institute for Supply Management’s factory index slumping to a two-year low this week, the yen will likely stay stronger than 80 to the dollar, according to Shinichi Horikawa, who helps manage the equivalent of about $12 billion at Mitsui Sumitomo Kirameki Life Insurance Co. in Tokyo.

Should the yen strengthen sharply beyond its postwar high, “the BOJ will likely ease further to respond to it,” he said.

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