Abe’s Victory Seen Eroding Demand for Biggest Debt
Shinzo Abe’s victory in Japanese elections gives him a mandate to implement the fiscal and monetary stimulus plans that have already fueled a slump in 20- year government bonds and the yen.
The yield premium investors demand to hold 20-year debt instead of 10-year securities climbed to 99 basis points on Dec. 5, the highest since 1999. That compares with a spread of 68 basis points for similar-maturity U.S. Treasuries. The yen sank to a 20-month low today and has fallen more than 5 percent against the dollar since Nov. 15, when Abe called for “unlimited” monetary easing by the Bank of Japan (8301) to end deflation and an increase in public-works spending, fueling concern the world’s largest debt may expand.
Abe’s Liberal Democratic Party yesterday won 294 seats in the 480-member lower house of parliament, while Prime Minister Yoshihiko Noda’s Democratic Party of Japan lost three-fourths of its lawmakers, according to public broadcaster NHK’s vote count. The LDP returned to power after three years, following a pledge to achieve nominal economic growth of 3 percent and set an inflation target with the central bank of 2 percent.
“Japan’s economy is likely to turn to faster growth next year from the pessimistic atmosphere that we’re in now,” said Kazuhiko Ogata, Tokyo-based chief economist for Japan at Credit Agricole SA. “The bond market will price in that outlook,” steepening the yield curve, he said.
LDP partner New Komeito won 31 seats, giving the coalition a two-thirds majority that would enable it to override most decisions by the upper house, where the DPJ is the largest party.
Investor demand for Japan’s longer-term bonds will face a test tomorrow as the Ministry of Finance sells 1.2 trillion yen ($14 billion) in 20-year bonds. The securities drew bids valued at 3.67 times the amount on offer at the auction last month, exceeding the average of 3.28 for the previous 10 sales.
The gap between the 20-year and 10-year yields has widened seven basis points, or 0.07 percentage point, since Nov. 15, according to data compiled by Bloomberg.
Abe’s LDP is proposing a “large scale” supplementary budget to stimulate the economy, according to election pledges posted on its website. He said on Dec. 9 that economic conditions next year will determine whether Japan will go ahead with the sales-tax increase that Noda pushed through. The 5 percent tax was due to double in 2015.
Standard & Poor’s may revise the outlook on Japan’s AA- rating to stable from negative if the new administration carries out fiscal reforms, while it might consider a downgrade if the nation’s debt trajectory is unchanged, the rating company said in an e-mail today. Fitch Ratings Ltd., which has a negative outlook on its A+ rating on Japan, said today Abe’s victory has no immediate ratings implications.
Tokyo-based Asahi Glass offered 20 billion yen of five- year, 0.31 percent notes, while Tokyo Tatemono, a real-estate developer, issued 10 billion yen of four-year, 0.81 percent debt, according to separate statements from Mitsubishi UFJ Morgan Stanley Securities Co. and Mizuho Financial Group Inc. Citizen, a Tokyo-based watch maker, sold 10 billion yen of five- year, 0.42 percent bonds, according to Nomura Holdings Inc.
Japan’s corporate notes have handed investors a 1.4 percent return this year, compared with the 2.1 percent gain for the nation’s sovereign debt, according to Bank of America Merrill Lynch data. Company bonds worldwide have returned 10.5 percent, the data show.
Abe told NHK a special parliamentary session to vote him into office may be held Dec. 25 or 26. He may name former Prime Minister Taro Aso as finance minister when he picks his Cabinet as early as Dec. 26, Kyodo News reported, without saying where it got the information.
Japan’s national debt has climbed to 237 percent of its annual economic output, the most in the world and compared with 171 percent for Greece, according to International Monetary Fund estimates. S&P rates Greece’s debt “selective default.”
Abe’s calls for a 2 percent inflation target and more BOJ stimulus have accelerated losses in the yen, which slid to 84.48 per dollar today, the weakest since April 2011. Japan’s central bank expanded its fund to buy assets such as government bonds and corporate debt by 11 trillion yen to 66 trillion yen in October. Its board will meet Dec. 19-20.
The election “may have some effect on the BOJ policy board meeting,” said Yuji Saito, director of the foreign exchange department in Tokyo at Credit Agricole. “The market may try to weaken the yen beyond the psychological level of 85” per dollar, he said.
Credit-default swaps on Japan’s sovereign debt have so far shown few signs of concern the bond market will worsen.
The cost to insure Japan’s debt for five years rose 1.5 basis points to 76 as of 12:19 p.m. in Tokyo, according to Citigroup Inc. prices. That compared with 143 basis points at the end of last year, according to CMA, a data provider owned by McGraw-Hill Cos. that compiles prices quoted by dealers in the privately negotiated market.
The Nikkei 225 (NKY) Stock Average has climbed about 14 percent since the middle of last month to 9,869.77 today.
“There are strong market expectations of more fiscal spending, and that will probably cause stocks to rise and the yen to weaken toward the year-end,” Takafumi Yamawaki, Tokyo- based chief rates strategist at JPMorgan Chase & Co., said yesterday. The yield on the 10-year Japanese government bond may rise toward 0.8 percent, he said.
The 10-year rate ended last week at 0.725 percent and touched a nine-year low of 0.685 percent on Dec. 6.
The Nikkei should reach 10,000 in March, Ichiro Takamatsu, fund manager at Bayview Asset Management Co., which oversees about 150 billion yen, said yesterday. Shares may be sold if the BOJ doesn’t ease monetary policy this week, he said.
Some investors expressed concern that yields on Japanese bonds maturing in more than 10 years will rise if the extra budget for the fiscal year ending March 2013 expands significantly, according to Ministry of Finance officials at a briefing on Dec. 14. They spoke after meeting with primary dealers obliged to bid at government bond auctions.
Additional government outlays “would show the new administration’s willingness to delay fiscal consolidation, which of course can be a reason for a rating company to consider cutting Japan’s grade,” Mana Nakazora, chief credit analyst in Tokyo at BNP Paribas SA, said at a media briefing on Dec. 13. “We should take into account a possible sovereign downgrade, and such moves will increase funding costs” for Japan, she said.
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