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No Shirakawa Eulogies as JGBs Look Beyond Weak BOJ

BOJ Governor Masaaki Shirakawa
Masaaki Shirakawa, governor of the Bank of Japan. Shirakawa will step down at the same time as two deputies, about three weeks before his term expires. Photographer: Tomohiro Ohsumi/Bloomberg

The Bank of Japan under Governor Masaaki Shirakawa’s successor may buy longer bonds and cut the deposit rate paid to lenders as it steps up efforts to defeat deflation, the bond market is signaling.

Yields on two-year notes are at 0.025 percent, the lowest since September 2002 and below the 0.1 percent interest that banks get from deposits held at the BOJ. Five-year yields were at a record 0.135 percent today amid speculation new leaders at the BOJ will extend the maturity of debt the bank buys. Those yields compare with 0.26 percent and 0.87 percent respectively for two- and five-year Treasuries.

Shirakawa, who last week announced he will step down on March 19 before his term ends, has opposed cutting the deposit rate and has limited the central bank’s buying of government notes to those maturing in up to three years. Koichi Hamada, who advises the prime minister on monetary policy, said in December the BOJ’s stimulus is “very weak.” The central bank will probably keep policy unchanged at a two-day meeting starting today, according to a survey of economists by Bloomberg News.

“Financial markets are reflecting the possibility that there will be a paradigm change in BOJ policy,” said Kazuhiko Ogata, the Tokyo-based chief economist for Japan at Credit Agricole SA, one of the 24 primary dealers obliged to bid at Japan’s debt auctions. “The bond market is pricing in a probable purchase of longer-maturity debt as well as a cut in the deposit rate.”

BOJ Contenders

Shirakawa and his fellow board members doubled the BOJ’s 1 percent inflation target on Jan. 22, heeding pressure from Prime Minister Shinzo Abe. The bank said it will buy 10 trillion yen ($107 billion) of Japanese treasury bills and 2 trillion yen of government notes every month starting next year. While it’s similar to the open-ended asset buying of the Federal Reserve, the BOJ’s program doesn’t increase indefinitely in size like that of its U.S. counterpart.

Contenders to replace Shirakawa probably include Takatoshi Ito, an economist at Tokyo University who served in the Ministry of Finance, according to Bank of America Merrill Lynch. Others on the short-list may be Kazumasa Iwata, a former BOJ deputy governor; Kikuo Iwata, an economics professor at Gakushuin University; and Asian Development Bank President Haruhiko Kuroda, Bank of America Merrill Lynch analysts, led by Tokyo-based chief economist Masayuki Kichikawa, wrote in a research note on Feb. 6.

Kuroda said in an interview with Bloomberg on Feb. 11 that Japan has “substantial room for monetary easing.” He declined to comment on whether he was a contender to lead the BOJ.

BOJ Responsible

Shirakawa will step down at the same time as two deputies, about three weeks before his term expires. Abe will propose nominees for the next governor and deputies all at the same time, he said in parliament on Feb. 7. Deflation is a monetary phenomenon and the central bank is responsible for reaching the 2 percent inflation target, Abe said.

The new governor “has to show how different he is from Shirakawa,” said Tadashi Matsukawa, who helps oversee the equivalent of $1.5 billion as head of fixed-income investment at PineBridge Investments Japan Co. in Tokyo. “I see a more than 50 percent chance that the BOJ will buy longer-maturity debt.”

Elsewhere in domestic credit markets, Japan Expressway Holding & Debt Repayment Agency sold 30 billion yen of 20-year, 1.757 percent bonds guaranteed by the government, SMBC Nikko Securities Inc. said yesterday in a statement.

Debt Auction

The extra yield that investors demand to hold Japanese corporate notes rather than sovereign debt was at 43 basis points yesterday, matching the lowest since October, according to Bank of America Merrill Lynch index data. The spread for company bonds worldwide was 148, the data show.

A Ministry of Finance sale of its longest maturity debt today signaled decreasing investor appetite for securities that are the most sensitive to changes in interest-rate expectations.

The ministry’s auction of 399 billion yen of 40-year debt attracted bids valued at 3.51 times the amount available, down from 3.82 at the previous offering in November.

The yen has tumbled almost 13 percent against the dollar since Nov. 15 when Abe called for “unlimited” money printing by the central bank to end deflation. Elections a month later elevated him to Japan’s highest office. It touched 94.46 per U.S. currency this week, the weakest since May 2010, and was at 93.06 at 1:01 p.m. in Tokyo.

When the central bank first introduced its asset-purchase program as a temporary measure on Oct. 5, 2010, Shirakawa said the BOJ was paying “maximum attention” to avoid the impression that it was financing government debt.

Market Liquidity

The governor reiterated his position last month that cutting the deposit rate would substantially reduce liquidity in money markets and prevent financial companies from raising funds when necessary.

Japanese government bonds maturing in more than a year have returned 9.6 percent since Shirakawa took the helm of the Bank of Japan in April 2008, data compiled by the European Federation of Financial Analyst Societies and Bloomberg show.

JGBs posted gains of as much as 28 percent during each term of Shirakawa’s predecessors since 1994, the data show, while Japan’s consumer price gains haven’t been 2 percent or more since 1991.

The benchmark 10-year bond yield was at 0.74 percent today, 5 1/2 basis points, or 0.055 percentage point, from the 9 1/2-year low touched in December.

“What the BOJ has done to end deflation wasn’t effective and not enough,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Co. “The bond market is still skeptical that there will be 2 percent inflation. Otherwise, it’s impossible for the 10-year yield to stay below 0.8 percent.”

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