Yen Yields Frozen by BOJ Skip G-7 Jump on Slowdown
Japan’s debt yields are the lowest in seven months relative to its major economic peers as a surprise contraction in the world’s third-largest economy cements expectations the central bank will print more money.
Yields on Japanese government bonds declined to 92 basis points below the rates on an index of sovereign bonds from Group of Seven counterparts this week, the widest gap since June 30, according to Bank of America Merrill Lynch data. Ten-year JGB yields were 1.29 percentage points lower than similar maturity Treasuries on Feb. 13, the most since March 20.
Japan’s lower yields underscore expectations the central bank will still be bolstering monetary stimulus to end deflation as its peers put the brakes on easing, according to Resona Bank Ltd. and Nomura Research Institute Ltd. Data yesterday showed the nation’s economy shrank for a third-straight quarter, giving Prime Minister Shinzo Abe ammunition in his argument that the Bank of Japan should pursue more aggressive stimulus.
“The outlook for monetary policy is totally different between Japan and other countries,” said Koichi Kurose, chief economist in Tokyo at Resona Bank, which oversees about $160 billion. “The BOJ’s monetary easing is expected to focus on how to avoid an increase in yields.”
BOJ Governor Masaaki Shirakawa and his fellow policy makers refrained from adding to stimulus yesterday after a two-day meeting. Japan’s 10-year yields fell 1 1/2 points, or 0.015 percentage point, to 0.75 percent today, following a 2 1/2 basis point climb yesterday.
The central bank increased the size of its asset-purchase fund by 15 percent to 76 trillion yen ($820 billion) in December and adopted Abe’s 2 percent inflation goal the following month.
Shirakawa and two deputies will step down on March 19, allowing Abe to choose successors to prosecute his plan for expanded easing. The yen has weakened against all of its major peers in the past three months and touched 94.46 per dollar on Feb. 11, the lowest since May 2010. It strengthened to 92.57 at 3:01 p.m. in Tokyo.
Japan’s gross domestic product shrank 0.4 percent in the three months ended Dec. 31, government figures showed yesterday, while economists had estimated a 0.4 percent expansion. The GDP deflator, a measure of price changes across the economy, slid for a 13th quarter.
“The weak GDP data probably give Abe a convenient excuse to ask for additional monetary easing from the BOJ,” said Satoshi Shimamura, the head of rates and markets at the investment-strategy department of MassMutual Life Insurance Co. in Tokyo.
Elsewhere in Japan’s credit markets, NTT DoCoMo Inc. is considering a possible debt sale, Chief Financial Officer Kazuto Tsubouchi said in an interview on Feb. 13. The nation’s biggest wireless operator has 130 billion yen of bonds maturing this year, according to data compiled by Bloomberg.
Japanese corporate notes have handed investors 0.43 percent so far this year, compared with a 0.78 percent decline in company bonds worldwide, Bank of America Merrill Lynch index data show.
The Markit iTraxx Japan index of credit-default swaps for 50 companies dropped to 117.3 basis points on Feb. 13, the lowest since July 2011, and was little changed yesterday, 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.
Merrill Lynch’s index for G-7 nations excluding Japan consists of sovereign bonds issued by the U.S., U.K., Germany, France, Italy and Canada. They have lost 1.3 percent in the past three months, while Japan’s debt returned 0.1 percent.
Federal Reserve Bank of St. Louis President James Bullard said on Feb. 13 that he wants “to see through the spring at least” before recommending a decrease in the Fed’s bond purchases. The U.S. central bank buys government and mortgage debt at a rate of $85 billion a month in its third round of so- called quantitative easing.
In the U.K., inflation has remained “stubbornly” above the Bank of England’s 2 percent target, the central bank said on Feb. 7. The European Central Bank left policy unchanged the same day with President Mario Draghi saying policy makers foresee a “gradual” recovery.
“Once the Fed starts debating how to gradually reduce QE3, it could drive Treasury yields higher,” said Tetsuya Inoue, a former BOJ official who is now the chief researcher for financial markets at Nomura Research in Tokyo. “The euro area doesn’t have Japan’s deflation problem and there are some economies that are resilient, so the ECB isn’t in a situation where it can execute aggressive measures.”
Candidates for the next BOJ governor include 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 report this month.
Former BOJ deputy governor Toshiro Muto is the leading candidate to head the central bank, Reuters reported today, citing people close to the selection process. Muto is the most conservative among probable choices, according to Citigroup Inc.
Kazumasa Iwata told reporters yesterday a decline in the yen to 90 to 100 per dollar is within the range of a correction. Kuroda said in an interview with Bloomberg on Feb. 11 that Japan has “substantial room for monetary easing.”
“The prevailing atmosphere is that you won’t be a governor candidate unless you pledge to adopt a reflationary policy,” said Teruyoshi Sotome, a Tokyo-based senior bond strategist at Mizuho Securities Co., one of the 24 primary dealers obliged to bid at government debt sales. “The yield gaps between Japan and other countries will continue to widen.”
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