Japan’s bond risk is falling at the fastest pace in the developed world on bets Prime Minister Shinzo Abe will win a stronger mandate for economic stimulus in this weekend’s parliamentary elections.
Credit-default swaps that insure Japanese government bonds for five years slid 13 basis points in the past month to 69 basis points yesterday, according to data compiled by Bloomberg. Contracts for U.S. Treasuries slid three basis points during the period, while those for German bunds gained three basis points, or 0.03 percentage point.
Abe’s Liberal Democratic Party and its coalition partner are poised to win a majority in a July 21 upper-house election, the Nikkei newspaper reported yesterday, granting them control of both chambers of parliament. That will give the premier free rein to pursue a growth and fiscal consolidation plan known as Abenomics that has earned plaudits by debt-grading companies Fitch Ratings and Moody’s Investors Service.
“The elimination of the hung parliament will make it easier for the administration to carry out Abenomics,” said Kiyoshi Ishigane, a senior strategist at Mitsubishi UFJ Asset Management Co., which oversees more than $70 billion in Tokyo. “If you seriously want to consolidate finances, there’s no other way but to raise economic growth.”
Abe’s party is set to win almost 70 seats in the upper house election, putting the LDP and its coalition partner on track to secure more than the 122 seats needed for a majority, according to the Nikkei poll. His party took control of the lower house after a landslide victory in December.
Sovereign CDS are pricing in “the likelihood that the upper-house election will turn out positive for Abe and improve the outlook for corporate earnings,” said Mana Nakazora, a Tokyo-based chief credit analyst at BNP Paribas SA. “Resolving the hung parliament would be positive for JGBs.”
Deputy Economy Minister Yasutoshi Nishimura said a coalition victory would help the government pursue its policies, in an interview with Bloomberg Television today.
Japan’s benchmark 10-year debt yielded 0.805 percent today, the least in the world. The nation’s sovereign CDS have come down from as high as 87 basis points on June 24, according to Bloomberg-compiled data. A decrease in the contracts signals improving perceptions of creditworthiness.
The Bank of Japan doubled monthly bond purchases to more than 7 trillion yen ($70 billion) in April, after Abe urged the central bank to take steps to overcome 15 years of deflation. His Abenomics policies also include a 10.3 trillion yen fiscal spending package and a plan to loosen rules on businesses ranging from non-prescription drugs to construction.
Elsewhere in Japan’s credit market, Sumitomo Realty & Development Co. sold 20 billion yen of bonds in two tranches, including 1.098 percent, 10-year debt, according to a statement from Deutsche Securities Inc. yesterday. The Tokyo-based home developer offered 10-year securities in 2009 paying a 2.5 percent coupon, data compiled by Bloomberg show.
Japan’s corporate notes have returned 0.33 percent since the end of May, Bank of America Merrill Lynch data show. That compares with a 0.15 percent gain for the nation’s sovereign debt and a 1.49 percent loss for corporate bonds worldwide.
The yen weakened 0.5 percent to 100.13 per dollar as of 2:33 p.m. in Tokyo. It has dropped 21 percent in the past 12 months as Abe pledged to fuel 2 percent inflation.
“Abenomics, we think, is something that has a potential to stabilize the credit profile and the rating,” Andrew Colquhoun, the head of Asia-Pacific sovereigns at Fitch, said on July 15 in a Bloomberg Television interview.
Fitch downgraded Japan in May 2012 to A+, its fifth-highest rating, with a negative outlook. Standard & Poor’s ranks Japan AA-, also with a negative outlook, while Moody’s has an Aa3 grade on the nation, both the fourth-highest level. Domestic investors account for more than 90 percent of Japan’s debt holders, according to BOJ data.
“What keeps the Japanese sovereign rating at Aa3 is the financeability of this debt, as there’s a very strong home bias, a lack of foreign-currency risk and low interest rates,” Christian de Guzman, a Singapore-based sovereign analyst at Moody’s, said in an interview on July 16. “If growth materially picks up, implying that Abenomics has successfully worked perhaps, that might need to be reflected in the rating, and similarly so if it fails.”
Japan’s economy probably expanded 2.8 percent in the second quarter, according to the median forecast of economists surveyed by Bloomberg News, after the biggest jump in a year in the previous three months.
The nation’s public debt may balloon to the equivalent of 245 percent of gross domestic product this year, figures compiled by the International Monetary Fund show. That’s the highest ratio globally, followed by Greece’s 179 percent and compares with 108 percent for the U.S.
The government’s economic plans stop short of providing details on how to cut social-security costs that already account for 31 percent of the government budget in the fiscal year started April 1 in the world’s most-elderly nation.
“Prime Minister Abe will prioritize the economy’s revitalization above all,” said Hidenori Suezawa, a Tokyo-based chief strategist at SMBC Nikko Securities Inc., one of the 23 primary dealers obliged to bid at government bond sales. “While political stability is positive for credit, the flip side of it is that expansion of fiscal spending is negative.”
The premier has said he will look at economic data in deciding whether to go ahead with a planned doubling of the 5 percent consumption tax by 2015 to curb the growth in debt.
“Abe’s ability to carry out the tax increases will be tested in autumn,” said BNP’s Nakazora. “Should he fail, the negative effects will be gradually felt as Japan risks a sovereign downgrade and higher funding costs.”