Specter of Topix Tumbles Evoked by Broken JGB Link: Japan CreditMasaki Kondo, Mariko Ishikawa and Yumi Ikeda
The relationship between Japanese stock prices and government bond yields has collapsed, prompting analysts to question the sustainability of the Topix Index’s climb to a 4 1/2-year high.
A measure of the 60-day correlation between 10-year Japanese yields and the Topix slid to a two-year low of 0.17 this month, below the decade average of 0.42 and the 1 level that would represent lockstep moves. The gauge for 10-year Treasuries and the Standard & Poor’s 500 Index of U.S. equities was 0.67, according to Bloomberg data.
The last two times Japan’s bond yields and stock prices stopped heading in the same direction, in December 2010 and February 2007, it wasn’t long before shares tumbled, and Mizuho Corporate Bank Ltd. and Tokyo-based hedge fund Prospect Co. predict the trend will repeat. Options traders have turned bullish on the yen for the first time in eight months, reflecting concern that new Bank of Japan Governor Haruhiko Kuroda has limited tools to stoke inflation and growth.
“It’s not a normal state that both bond and stock prices are high, and what market participants including me are concerned about is the sustainability of the equity rally,” said Daisuke Karakama, a market economist in Tokyo at Mizuho, a unit of Japan’s third-biggest financial group by market value. “People are afraid that they’ll realize the king is actually naked,” he added, referring to Kuroda.
When the correlation between the stock gauge and JGB yields fell to 0.09 in February 2007, it preceded an almost two-year, 62 percent slump in the Topix amid the global financial crisis. After the measure reached 0.04 in December 2010, the Topix slumped 26 percent from an intraday high of 976.28 on Feb. 17, 2011, to 725.90 on March 15. That was four days after a record earthquake devastated Japan’s northeast.
Since Japanese Prime Minister Shinzo Abe took office on Dec. 26, the equity index has climbed 23 percent, the biggest winner among developed-nation markets, as he called for aggressive monetary easing to end deflation. It finished at 1,058.10 yesterday, the highest close since October 2008, and ended at 1,038.57 today.
The benchmark 10-year yield touched 0.56 percent today, the least globally and the lowest level since June 2003, when the record of 0.43 percent was reached. The 30-year yield slid 5 1/2 basis points, or 0.055 percentage point, to 1.62 percent, a level unseen since August 2010.
“Under normal circumstances, bond yields would rise when the economy improves, but here in Japan, we have to exit from deflation first and that won’t happen if borrowing costs rise,” said Akio Kato, the team leader for Japanese debt at Kokusai Asset Management Co., which manages the equivalent of $36 billion in assets in Tokyo. “The market is expecting yields to go lower as long as BOJ keeps buying.”
Kuroda this week took over the leadership of the BOJ, which buys notes maturing in one to three years as well as other securities through its 76 trillion-yen ($803 billion) asset-purchase fund that is projected to be used up this year. The central bank also scoops up 1.8 trillion yen of government bonds via a separate account every month.
In comparison, the Federal Reserve acquires $85 billion a month of government debt and mortgage-backed securities without a predetermined date of completion.
Kuroda told lawmakers on March 11 that the central bank’s current asset-purchase program isn’t sufficient to achieve the BOJ’s 2 percent inflation goal that it adopted at Abe’s urging. Policy makers will do “whatever we can” to meet the price target, he said at his inaugural news conference yesterday, adding that he’s confident the goal can be reached.
Elsewhere in Japan’s credit markets, Sumitomo Mitsui Trust Bank Ltd. hired Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. for an offering of five-year dollar bonds, according to a person familiar with the matter, who asked not to be identified because the details are private.
Nippon Flour Mills Co. registered to sell as much as 10 billion yen of notes, according to a filing yesterday with the Ministry of Finance. It takes effect on March 29 and is valid for two years.
Japan’s corporate bonds have handed investors 0.24 percent this month, compared with a 0.74 percent return on the nation’s sovereign debt, according to Bank of America Merrill Lynch index data. Company notes worldwide have gained 0.17 percent.
The yen has plunged about 18 percent in the past six months against the dollar, the biggest slide among major currencies. It rose 0.2 percent to 94.69 per dollar at 3:57 p.m. in Tokyo, after weakening to 96.71 on March 12, a level unseen since August 2009.
The dollar-yen’s three month risk reversal rate slid as low as minus 0.535 percent this week, the least since December 2011, indicating increased demand for options that grant the right to buy Japan’s currency versus the greenback. The rate had been positive since July until this month.
Currency depreciation typically lowers the prices of Japanese-made products overseas, making exporters more competitive against rivals such as Samsung Electronics Co. in South Korea. The improved earnings prospects for the nation’s manufacturers are prompting overseas investors to pile into Japanese equities.
Foreign money managers were net buyers of domestic shares every week since November and scooped up a record 1.12 trillion yen in equities in the period ended March 8, according to data from the Ministry of Finance going back to 2001. The Topix has risen 39 percent in the past six months, compared with a 2.6 percent decline in South Korea’s Kospi Index.
“I am confident that Japan can emerge from the last 20 years of depression,” said Nick Wright, the head of global markets for Japan at Barclays Plc. “Japan has got an active government with stated policies that are appealing to the equities market.”
Recent economic data suggest the weaker yen hasn’t yet spurred a turnaround. Government figures released this month showed consumer prices excluding fresh food declined 0.2 percent in January from a year earlier. Machinery orders, an indicator of corporate investment, dropped 13 percent in January from the prior month.
A depreciating yen eases pressure on domestic companies that need restructuring to be more competitive, according to Curtis Freeze, the Tokyo-based chief investment officer at Prospect, which manages about $300 million in Japanese shares for overseas investors. He’s been selling the nation’s stocks because they are overbought, he said.
“Companies are not changing; only share prices are changing, so it’s very much a technical rally,” said Freeze. “It’s all about hope and dream.”