Kuroda Seen Breaking Bank-Note Limit Buying JGBs

The Bank of Japan’s new leaders will abandon speed limits on debt purchases and scoop up longer-term bonds to meet their inflation target, primary dealers said.

Morgan Stanley MUFG Securities Co., Barclays Plc and Bank of America Merrill Lynch are among nine dealers expecting more buying of long-dated Japanese government bonds. Yields on 10-year JGBs may be at 0.7 percent by June 30, according to the median estimate in a Bloomberg News survey of the companies, matching the lowest ever quarter-end level. The rate touched 0.585 percent this week, the least since 2003 and about a third of the yield on similar maturity U.S. debt.

Dealers said the BOJ will likely scrap a self-imposed limit that its JGB holdings, which at the equivalent of $1.3 trillion are about the size of Australia’s annual economic output, don’t exceed the value of all yen in circulation. Haruhiko Kuroda, the nominee to succeed BOJ Governor Masaaki Shirakawa, said the so-called bank-note rule isn’t a standard among central banks, signaling a willingness to pilot the central bank into uncharted waters of monetary easing.

“The BOJ will highly likely pursue much more aggressive monetary easing, which might include a significant increase in JGB purchases,” said Nhan Ngoc Le, interest rate strategist at Morgan Stanley MUFG, one of 24 primary dealers obliged to bid at government debt sales. “They have the bank-note rule, but that’s not something that they have to stick with.”

The benchmark 10-year yield was at 0.675 percent today, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. It reached 0.585 percent on March 5, the least since June 2003 when the all-time low of 0.43 percent was set.

BOJ Independence

Japan’s central bank law was revised in 1998 to establish a policy-setting board that was independent of government influence. Kikuo Iwata, a nominee for deputy governor, said in January the law should be changed to let the government play a bigger role in setting policy goals. Prime Minister Shinzo Abe has signaled changing the legislation remains an option.

Shirakawa, who steps down on March 19, has warned that the perception of monetization, or financing government deficits, could trigger runaway inflation and a surge in JGB yields. That may imperil Japan’s ability to balance its books as its debt service costs already consume about half of annual tax revenue, even at the world’s lowest borrowing costs.

Five-year credit-default swaps that insure Japan’s sovereign bonds fell to 62 basis points yesterday, the lowest since November 2010, 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.

Sapporo, Fuyo

Elsewhere in Japan’s credit markets, Sapporo Holdings Ltd. sold 10 billion yen ($106 million) of five-year, 0.39 percent bonds, according to a statement yesterday from Mizuho Financial Group Inc. The Tokyo-based beverage producer last sold similar maturity notes in February 2012 with a coupon of 0.64 percent, according to data compiled by Bloomberg.

Fuyo General Lease Co. offered 10 billion yen of three-year, 0.3 percent debt, Mizuho said in a separate statement.

The extra yield that investors demand to own Japanese corporate bonds rather than sovereign securities was at 40 basis points yesterday, the lowest since September 2011, according to Bank of America Merrill Lynch index data. The spread for company notes worldwide was 145 basis points, or 1.45 percentage points.

Two Channels

The Bank of Japan buys JGBs through two channels: its asset-purchase program set up in October 2010 and outright purchase operations, also known as rinban. The APP targets sovereign debt maturing in one to three years while rinban operations encompass bonds maturing in up to 30 years.

Government securities acquired through the APP are excluded from the bank-note rule because of the program’s “temporary” nature, the central bank has said. Via rinban, the BOJ soaks up 21.6 trillion yen of government debt a year, with 90 percent allocated to notes maturing in 10 years or less.

“The BOJ is likely to announce bond purchases of more than 10 years of maturity in April,” said Chotaro Morita, the chief strategist for fixed income at Barclays in Tokyo. “The BOJ has to work out a plan to do that and may consider combining the rinban and asset-purchase fund.”

Barclays expects the 10-year rate to be at 0.65 percent in June, lower than its previous estimate of 0.7 percent, according to Morita.

Exceeding Bank-notes

The BOJ’s total bonds exceeded bank-notes in circulation for the first time in August. As of last month, its 66.5 trillion yen in regular holdings plus 26.4 trillion yen in securities bought through the APP compared with 82.9 trillion of money in circulation, the latest figures from the BOJ showed.

Kuroda, who currently serves as president of the Asian Development Bank, said in parliamentary hearings on March 4 that the bank-note rule isn’t something adopted by other central banks and that the BOJ should consider buying large amounts of longer-term debt.

Iwata, a professor at Tokyo’s Gakushuin University, told lawmakers the following day that the central bank is responsible for achieving its 2 percent inflation target and suggested that the BOJ leadership should be prepared to resign if the target isn’t met in two years.

His idea would mark a “big change, and markets are still very skeptical,” said Takuji Okubo, chief economist at Japan Macro Advisors who formerly worked at Goldman Sachs Group Inc.

‘Politicized’ BOJ

Federal Reserve Bank of Dallas President Richard Fisher said Abe has “politicized” the BOJ to end deflation.

“He’s aggressive. He has basically politicized the central bank, which worries me personally,” Fisher said yesterday in a speech in San Antonio. “But he wants to see this deflationary” tendency “exorcized” and “he’s working very, very hard to change things, and indeed the stock market has responded.”

Expanded easing may be easier said than done, according to former BOJ policy board member Atsushi Mizuno.

“Kuroda will hit the wall of reality,” Mizuno, a vice chairman at Credit Suisse AG in Tokyo and a member of the BOJ board from 2004 to 2009, said in an interview yesterday. “Increased bond buying would cause over-dependence on the BOJ and that’s not healthy for the market. I see the risk of a JGB bubble.”

Shirai Proposal

The central bank kept its asset-buying program unchanged at 76 trillion yen today at the conclusion of a two-day policy meeting. A proposal by board member Sayuri Shirai to begin open-ended asset purchases immediately rather than from next year and combine the buying with rinban operations was voted down by the group, the BOJ said in a statement. Policy makers next meet on April 3 under new leadership.

The government is boosting stimulus efforts to sustain stock gains and yen weakness. The Cabinet’s approval rate rose to 70 percent, according to a Nikkei newspaper poll published on Feb. 25.

The nation’s Topix Index of stocks has gained 25 percent since Abe’s Liberal Democratic Party swept to power in elections on Dec. 16.

The yen has tumbled 11 percent in that period and traded at 93.95 per dollar as of 4:02 p.m. in Tokyo. It was the worst performer among the 10 developed market currencies tracked by the Bloomberg Correlation Weighted Indexes in the past three months, losing 12 percent.

The final reading for Japan’s gross domestic product due on March 8 will probably show annualized 0.2 percent growth in the fourth quarter, according to the median estimate of economists in a Bloomberg poll.

Stimulus Effects

“Domestic growth is likely to pick up as economic stimulus starts to take effect,” said Hidenori Suezawa, the Tokyo-based chief strategist at SMBC Nikko Securities Inc. “Monetary easing is likely to drive yields lower temporarily, but the sharper the drop, the bigger the rebound would be.”

Suezawa expects the benchmark yield to rise to 0.9 percent in the second quarter, the highest estimate among 18 that Bloomberg compiled from the dealers.

Minutes of the BOJ’s Jan. 21-22 meeting showed that a few board members proposed extending the maturity of bonds the central bank buys.

Demand for super-long bonds will be tested tomorrow when the Ministry of Finance offers up to 700 billion yen in 30-year securities. The last auction on Jan. 10 drew bids valued at 3.52 times the amount on offer, the lowest since June.

“Tremendous expectations for the BOJ are completely offsetting any upward pressure on borrowing costs,” said Shogo Fujita, the chief Japanese bond strategist in Tokyo at Bank of America Merrill Lynch. “It’s possible the BOJ will increase purchases of bonds with maturity over 10 years under rinban. Scrapping the bank-note rule will be a prerequisite for this.”

Company               Strategist       Forecast  BOJ Plan
Barclays             Chotaro Morita     0.65%     X    (Feb. 26)
BNP Paribas          Atsuhi Ito           -       X    (Feb. 26)
BofA Merrill Lynch   Shogo Fujita       0.7%      X    (Feb. 27)
Citigroup            Eiji Dohke         0.85%          (March 1)
Credit Agricole      Kazuhiko Ogata     0.6%      X    (March 6)
Credit Suisse        Tomohiro Miyasaka  0.7%           (March 6)
Daiwa                Toru Yamamoto      0.8%           (Feb. 26)
Deutsche             Makoto Yamashita   0.9%           (Feb. 26)
JPMorgan             Takafumi Yamawaki  0.7%      X    (Feb. 26)
Mizuho Corporate     Atsushi Arai       0.75%          (Feb. 26)
Mizuho Securities    Teruyoshi Sotome   0.85%          (Feb. 28)
Morgan Stanley MUFG  Nhan Ngoc Le       0.8%      X    (March 6)
MUFJ Morgan Stanley  Jun Ishii          0.65%     X    (Feb. 28)
Okasan               Makoto Suzuki      0.7%           (Feb. 28)
RBS                  Akito Fukunaga     0.5%           (Feb. 27)
SMBC Nikko           Hidenori Suezawa   0.9%           (March 6)
Societe Generale     Takuma Sugawara    0.6%      X    (Feb. 26)
Sumitomo Mitsui      Daisuke Uno        0.6%           (Feb. 27)
Tokai Tokyo          Kazuhiko Sano      0.55%     X    (Feb. 27)
Average:                                0.7%      9
Respondents: 19
NOTE: ‘Forecast’ shows the strategists’ estimates of the 10-year
note yield by the end of June. X under ‘BOJ Plan’ shows the
strategists said the BOJ may increase purchases of government
bonds this year with maturities of 10 years or more. The dates
show when the forecasts were obtained

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