Bonds Most Expensive Since Lehman Versus Stocks: Japan Credit

Japanese bonds are the most expensive relative to local shares since the collapse of Lehman Brothers Holdings Inc. amid growing doubts that companies’ earnings will meet analysts’ forecasts.

The Nikkei 225 Stock Average’s earnings yield, or estimated net income per share divided by the stock price, was 6.03 percentage points more than Japan’s 10-year bond yield on Aug. 22, the most since October 2008, according to Bloomberg data. The similar spread in the U.S. reached 6.82 percentage points on Aug. 19, a level unseen since December 2008.

Analysts estimate a more than 10 percent increase in corporate profit each year for the next two years for companies in the Nikkei index even as Goldman Sachs Group Inc., JPMorgan Chase & Co. and Citigroup Inc. have cut growth forecasts for the U.S., Japan’s second-biggest export market after China. Bonds have climbed globally since the Federal Reserve pledged this month to keep interest rates at a record low through mid-2013.

“People in the stock market tend to have a bullish outlook mixed with a bit of wishful thinking,” said Masaru Hamasaki, who helps oversee the equivalent of $24 billion as chief strategist at Toyota Asset Management Co. in Tokyo. “There’s a bias in the bond market that yields will stay low regardless of how the economy performs.”

Companies included in the Nikkei are projected to post a 14 percent increase in earnings per share this fiscal year, followed by a 15 percent gain next year, analysts’ estimates compiled by Bloomberg show. Of the 220 stocks that have analyst coverage, only 20 have recommendations to sell compared to 186 to buy, the consensus ratings compiled by Bloomberg show.

Slowing U.S. Economy

Manufacturing in New York contracted for a third month, while in Philadelphia it shrank by the most since March 2009, Fed surveys showed this month. The Thomson Reuters/University of Michigan index of consumer sentiment plunged to the lowest since 1980.

U.S. gross domestic product may have grown at a 1.1 percent annual pace in the April-to-June quarter, down from the 1.3 percent projected last month, according to the median estimate of economists before the Commerce Department data today. Goldman last week lowered the U.S. growth forecast for this year to 1.5 percent from 1.7 percent.

“The slowdown in the U.S will damage corporate earnings in Japan, which will change the entire picture. The stock market is falling because it already expects that,” said Norihiro Fujito, a senior investment strategist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co. “Counting on valuations is like staring at the rear-view mirror while driving a car.”

Jackson Hole

Fed Chairman Ben S. Bernanke is scheduled to speak today at the bank’s annual symposium in Jackson Hole, Wyoming. Ten-year Treasury yields slid to a record on Aug. 18 on prospects that the slowing economy will continue to prevent the U.S. central bank from tightening monetary policy.

The yen has climbed 6.5 percent over the past three months versus its U.S. counterpart and touched a post-World War II record of 75.95 per dollar on Aug. 19. A stronger yen makes Japanese-made products costlier overseas and reduces the value of overseas sales by the nation’s exporters when repatriated.

Japan’s large manufacturers base their business plans for this fiscal year on the assumption that the yen will average 82.59 per dollar, according to the Bank of Japan’s quarterly Tankan survey released on July 1.

Decreasing Demand

“The negative influence from foreign exchange will be amplified by a global drop in demand for Japanese products,” said Mitsubishi UFJ’s Fujito. “The slump in exporters’ shares clearly reflects that.”

The Nikkei 225 has lost 11 percent in August, set for its worst month since May 2010. Sony Corp., an electronics maker that gets 67 percent of its revenue outside the country, sank to the lowest level since February 2009 on Aug. 24. Japan’s government debt has returned 0.2 percent to investors this month, an index compiled by Bank of America Merrill Lynch showed.

Japan’s economy slipped into its third recession in a decade after a record earthquake and subsequent tsunami hit the country on March 11, leaving more than 20,000 dead or missing. The Bank of Japan has since expanded its asset-purchase fund that buys government bonds, corporate debt and stock funds. The BOJ left benchmark interest rates unchanged on Aug. 4 at a range of between zero and 0.1 percent.

BOJ’s Easing Options

“There’s an 80 to 90 percent chance that the BOJ will ease policy further by the end of September,” said Kazuhiko Sano, chief debt strategist at Tokai Tokyo Securities Co., one of the 25 primary dealers obliged to bid at government debt sales. “Three steps that the BOJ may take are: purchasing longer-maturity government bonds, abolishing interest on banks’ deposits at the BOJ and lowering benchmark rates.”

Banks earn 0.1 percent interest on funds parked at their BOJ accounts that exceed the legal requirement. The central bank will hold a policy meeting on Sept. 7.

Japan’s benchmark 10-year debt yields 1.035 percent, the second-lowest after Switzerland among the 32 bond markets tracked by Bloomberg, and compared with 2.23 percent for similar-maturity U.S. Treasuries.

The Nikkei 225 is 77 percent below its peak in December 1989, as Japan’s deflation-mired economy has barely grown for the past two decades. The BOJ has kept its benchmark interest rates at or below 1 percent since 1995 to stimulate the economy.

“Japan’s bond yields won’t rise very much, because this country’s economy doesn’t grow,” said Tokai Tokyo’s Sano. “Economic growth comes from people’s aspiration to a luxurious life. With a few exceptions, most people here no longer have such dreams.”