BOJ Fails to Match Fed in Quashing Deflation Bets: Japan Credit

BOJ Fails to Match Fed in Quashing Deflation Bets
Easing by the BOJ, which ends a two-day meeting today, has so far failed to turn around a decade of falling prices that weighs on growth. Photographer: Tomohiro Ohsumi/Bloomberg

Japan’s bond market is signaling the nation’s central bank won’t succeed in emulating the Federal Reserve in printing its way to an economic recovery.

Japan’s 30-year bond yield was 1.19 percentage points lower than for similar-maturity U.S. Treasuries on Sept. 14, the most since May 10 and suggesting little concern among investors that inflation will eat into the value of the yen-based debt. A Bloomberg News survey of economists showed that none anticipate inflation to meet the Bank of Japan’s 1 percent target through the end of March 2014.

Since Fed Governor Ben S. Bernanke unveiled open-ended bond purchases last week, expectations for U.S. price gains climbed to a 16-month high. The BOJ, which bolstered monetary stimulus at the end of a two-day meeting today, has so far failed to turn around a decade of falling prices that weighs on growth. Prime Minister Yoshihiko Noda has joined the deflation fight too, pledging to beat it within a year as he faces party elections on Sept. 21.

“There is a big difference in the degree of enthusiasm between the BOJ and the Fed,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Co. “The BOJ just takes a wait-and-see attitude despite its inflation goal, while the Fed is striving to reduce unemployment.”

Japan’s central bank increased its asset-purchase fund to 55 trillion yen ($695 billion) from 45 trillion yen, according to a statement released in Tokyo today. Five of 21 analysts surveyed by Bloomberg News predicted easing while 11 forecast the action by October.

JGBs Advance

Japanese bonds rose, with yields on the benchmark 10-year government securities falling two basis points, or 0.02 percentage point, to 0.795 percent after the BOJ’s move.

The Fed introduced purchases of $40 billion of mortgage debt a month on Sept. 13 in a third round of so-called quantitative easing, or QE, to stimulate the economy through lower borrowing costs. Policy makers are looking for “ongoing, sustained improvement” in the job market, Bernanke said.

The gap in yield between five-year Treasuries and similar-maturity inflation-linked debt, a gauge of expectations for U.S. consumer prices, widened to 2.47 percentage points on Sept. 17, the most since May 2011. The one-year break-even rate slid to a low of negative 0.3 percentage point on June 29.

Meanwhile, the five-year break-even in Japan was at 0.61 percentage point yesterday, compared with minus 0.38 percentage point in November.

Japan’s consumer prices excluding food and energy have fallen an average of 0.6 percent per month from a year earlier over the past 10 years, according to government data compiled by Bloomberg. That compares with average gains of 1.9 percent in the U.S.

Corporate Bonds

Elsewhere in Japan’s credit markets, Tokyo-based Global One Real Estate Investment Corp. hired Mitsubishi UFJ Morgan Stanley Securities Co. for a sale of four-year bonds, the brokerage said in a statement yesterday.

The prefectures of Kyoto and Chiba and Japan Finance Corp. also hired banks for offerings of securities, according to data compiled by Bloomberg.

The extra yield that investors demand to hold Japanese corporate notes instead of sovereign debt climbed five basis points since the end of July to 53 basis points yesterday, data compiled by Bloomberg show. The spread for company bonds worldwide fell 30 to 171 in the period, according to the data.

Aging Population

An aging population is weighing on demand for goods and services in the world’s third-largest economy, helping prolong deflation. More than a quarter of Japan’s population will be over 65 years old in 2014, the highest ratio globally, according to U.S. Census Bureau estimates compiled by Bloomberg.

“The prevailing atmosphere shows no clue on when inflation will rise into positive territory and stay there,” said Daisaku Ueno, a senior foreign-exchange and fixed-income strategist at Mitsubishi UFJ Morgan Stanley in Tokyo., one of the 25 primary dealers obliged to bid at government debt sales.

Noda made ending deflation part of his campaign to lead Japan’s ruling Democratic Party of Japan, with a Yomiuri newspaper poll showing he’s favored to win at a party election this week. He’s pledged to call national elections “soon.”

While the persistent decline in consumer prices saps economic growth, currency strength is hurting the competitiveness of Japan’s exporters such as Panasonic Corp. and Nissan Motor Co., threatening to derail a recovery from last year’s record earthquake and tsunami. The yen traded at 79.07 per dollar as of 1:06 p.m. in Tokyo, compared with the post-World War II high of 75.35 reached Oct. 31.

China Tensions

The nation’s overseas shipments fell for a third month in August, dropping 7.5 percent from a year earlier, according to the median estimate of economists before the Ministry of Finance releases the data tomorrow. Carlos Ghosn, chief executive officer of Nissan, Japan’s second-largest automaker, said this month that the rising currency is deterring the company from expanding domestic production.

Adding to exporters’ plight are diplomatic tensions between Japan and China that have escalated since Noda’s government last week purchased and nationalized islands claimed by both nations. Nissan halted production at some plants while Panasonic reported damage to its operations in China as protesters smashed store fronts and cars in demonstrations.

“Japanese companies’ sales and reputation with Chinese consumers are likely to be affected, at least in the short term,” Fitch Ratings said yesterday in a statement.

Sovereign Risk

The cost to insure Japan’s sovereign debt against nonpayment for five years was at 75.4 basis points yesterday after touching 66.5 basis points on Sept. 12, the lowest since December 2010, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. A drop in the contracts signals improving perceptions of creditworthiness, while an increase suggests the opposite.

Noda last month pushed through legislation to raise Japan’s sales tax for the first time since 1997 in a bid to lessen the government’s dependence on debt.

The BOJ’s balance sheet has expanded 42 percent since September 2008 when Lehman Brothers Holdings Inc. collapsed, sparking the worst financial crisis since the Great Depression. The Fed’s total assets have tripled during that period.

The U.S. central bank bought $1.75 trillion of mortgage and Treasury debt in the first round of quantitative easing, or QE1, from November 2008 to March 2010. It then acquired $600 billion of Treasuries between November 2010 and June 2011 in QE2, bringing the total purchases to $2.35 trillion.

Asset Purchases

The BOJ has bought assets worth about $1.42 trillion since November 2008 through its purchases of government debt and the asset-purchase program.

BOJ Governor Masaaki Shirakawa told reporters on Aug. 9 that it is important to explain the central bank’s methods in an easy-to-understand manner rather than paying “lip service.”

Bernanke said at a news conference last week that he’s adopting a "Main Street policy" to create jobs.

“In terms of raising expectations for inflation, the Fed is more successful than the BOJ,” said Jun Kawakami, a market economist at Mizuho Securities Co., a primary dealer. Compared with Bernanke, Shirakawa comes across as serious and thus “lacks a sense of showmanship,” he said.

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