Bernanke Strikes First Yen Blow as Yield Gap Rises: Japan Credit
While Prime Minister Shinzo Abe piled pressure on the Bank of Japan to weaken the yen last week, the Federal Reserve struck the first blow against the currency.
A signal from Fed board members that they may end bond purchases in 2013 helped drive the yen to a 2 1/2 year low of 88.41 per dollar on Jan. 4, still 15 percent stronger than its decade average. The extra yield on 10-year Treasuries instead of similar-maturity Japanese government bonds reached 1.13 percentage points last week, the most in nine months and attracting funds into dollar assets.
“With a possible pickup in the U.S. economy, the dollar is more likely to rise than the yen,” said Jun Kawakami, a market economist at Mizuho Securities Co., one of the 24 primary dealers obliged to bid at Japan’s debt sales. “While there’s a good chance that the Fed will reduce bond purchases as early as this year, there is absolutely no exit strategy in sight for the BOJ, creating a contrast between their policies.”
In a New Year’s address, Abe reiterated his call for “bold” monetary easing by the BOJ, saying the most urgent issue for the nation is to end deflation and curb the yen. Two days later, minutes of a Dec. 11-12 Fed meeting led by Ben S. Bernanke showed several members advocated cutting the $85 billion monthly buying of notes this year as the economy expands at a moderate pace and unemployment declines.
The yen rose 0.3 percent to 87.87 per dollar as of 2:51 p.m. in Tokyo today, after dropping past 88 on Jan. 4 for the first time since July 2010. The currency has weakened from a postwar high of 75.35 in October 2011, helping make Japanese-made products more competitive overseas and boosting the repatriated value of exporters’ earnings.
The depreciation of the yen is helping Panasonic Corp. (6752) compete, company chairman Fumio Ohtsubo told reporters in Tokyo today. The manufacturer of Viera televisions wants a stable local currency that’s weaker than 90 per dollar, he said.
The ideal yen level would be 90 to 100 yen per dollar, Hiroshi Tomono, chairman of the Japan Iron and Steel Federation, told reporters in Tokyo today.
The Topix Index (TPX) of Japanese shares closed last week more than 20 percent higher than its low in November, sapping demand for safer assets such as JGBs. It fell 0.8 percent today. Japan’s 10-year bond yield touched 0.84 percent today, the most since Aug. 21, compared with the 1.88 percent rate for similar-maturity U.S. Treasuries.
The yen’s actual value last year was 103.9 per dollar after taking into account differences in consumer prices between Japan and its trading partners, according to estimates from the Organization for Economic Cooperation and Development.
No domestic company can generate a profit by making goods at such a disparity between costs and prices, Ryoji Musha, president of Musha Research Co. in Tokyo, wrote in a research note on Jan. 4 about purchasing power and nominal yen rates.
The nation’s Ministry of Finance is scheduled to sell 2.3 trillion yen ($26 billion) of 10-year notes tomorrow, followed by a 700 billion-yen auction of 30-year bonds on Jan. 10.
Five-year credit-default swaps that protect Japan’s sovereign debt from nonpayment dropped by a record 62 basis points last year and were at 75 basis points on Jan. 4, according to CMA, a data provider owned by McGraw-Hill Cos. A decline signals improved perceptions of creditworthiness.
Abe’s Liberal Democratic Party, which won a landslide victory in lower house elections last month, is demanding a 2 percent inflation goal, twice the BOJ’s current target. The LDP gives the “highest priority” to defeating deflation and yen strength and is aiming for 3 percent nominal economic growth, according the party’s election pledges posted on its website.
Japan’s economy will probably expand 0.65 percent this year, compared with a 2 percent growth in the U.S., according to the median estimates of economists surveyed by Bloomberg.
The Dollar Index, which tracks the greenback against the currencies of six major U.S trading partners, has fallen about 5 percent since the Fed embarked on bond purchases in 2008. In the latest round of so-called quantitative easing, the policy-setting Federal Open Market Committee announced last month it will buy $45 billion of Treasuries a month on top of $40 billion purchases of mortgage-backed debt.
A few FOMC members “expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013,” according to the minutes of last month’s meeting released on Jan. 3. “Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013.”
Japanese Finance Minister Taro Aso said on Dec. 28 that the U.S. should have a stronger dollar and that foreign countries “have no right to lecture us” on currency policy.
“The dollar-yen rate will rise beyond 90,” said Yuji Kameoka, chief currency strategist at Daiwa Securities Co., Japan’s second-biggest brokerage. A full-fledged U.S. economic recovery from about the second half of this year makes “an end to quantitative easing more likely, widening U.S.-Japan yield spreads.”
The BOJ added 10 trillion yen last month to its 66 trillion-yen program for buying securities, including government debt maturing in three years or less. Yields on the short-term notes have all collapsed to about 0.1 percent amid central-bank buying, which is intended to spur inflationary pressures and growth through low borrowing costs.
Concern that inflation will diminish the value of fixed payments from bonds is more evident in the rates on longer-term securities. The extra yield investors demand to hold 30-year JGBs over three-year notes rose to 1.9 percentage points on Jan. 4, the most since April 2011.
“As the BOJ buys more, yields will go lower on short- to medium-term notes,” said Shogo Fujita, chief Japanese bond strategist at Bank of America Merrill Lynch, a primary dealer. “The yield curve will steepen as inflation expectations and growth prospects push longer rates higher.”
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