Kuroda Endgame Seen as Swaps Climb Most Since ’10: Japan CreditMasaki Kondo, Mariko Ishikawa and Shigeki Nozawa
Japan’s swap market is already starting to anticipate central bank Governor Haruhiko Kuroda’s endgame even as he makes his first monetary easing moves.
Two-year overnight-index swap rates that reflect investor expectations for the Bank of Japan’s benchmark rate are set for the biggest monthly jump since November 2010 and reached 0.095 percent this week, according to data compiled by Bloomberg. The contract has climbed from a low of 0.039 percent in January to the highest since July 2011, approaching the 0.1 percent upper range of the Bank of Japan’s benchmark rate target. The comparative swap rate in the U.S. was at 0.163 percent.
“Because the BOJ is providing a large amount of funds, rates may fall in the near term, but it’s more natural to think rates will rise in the future,” said Masaru Hamasaki, a senior strategist in Tokyo at Sumitomo Mitsui Asset Management Co., which oversees the equivalent of $104 billion. “Overnight index swaps signal future rates, so it makes sense for them to go higher.”
The swaps suggest investors are growing more confident Kuroda will drive inflation toward the 2 percent goal even as skeptics from Bill Gross, who runs the world’s biggest bond fund, to former BOJ Deputy Governor Kazumasa Iwata question whether it can be achieved. A measure of consumer-price expectations in Japan was at the highest on record after the central bank announced on April 4 it will double its holdings of government bonds and stock funds to help spur economic growth.
The BOJ pledged to reach the price goal in two years and switched its operation target to the monetary base -- cash in circulation and the money that financial institutions have on deposit at the central bank -- from the rate that banks charge each other for overnight loans. Prime Minister Shinzo Abe has called for “unlimited” stimulus by the central bank.
The two-year rate on overnight-index swaps, used to wager on changes in the BOJ’s target rate, has risen 2.25 basis points since the end of March. Receding expectations that the BOJ will cut the 0.1 percent interest rate on excess reserves it pays to lenders helped push up the rate, said Tadashi Matsukawa, the head of fixed income investment at PineBridge Investments Japan Co. in Tokyo. Kuroda said on April 4 there’s no need to reduce the rate.
“The key to the success of Abe’s economic policy is low bond yields,” said Matsukawa, who helps oversee about $1.4 billion in assets. “A cut in the excess-reserve rate is still being kept as an option” for that purpose, he said.
The yield on Japan’s benchmark five-year note climbed to a one-year high of 0.32 percent on April 11, more than tripling from the all-time low of 0.095 percent reached last month. The rate fell one basis point to 0.235 percent today.
Japan’s five-year, zero-coupon inflation swap rate advanced to 1.34 percent yesterday, the most on record going back to 2008, based on figures from Meitan Tradition Co. The contract narrowed its spread from its U.S. equivalent to 1.14 percentage points last week, the least since December 2008. The swaps allow investors to exchange floating payments tied to an inflation rate with fixed ones or vice versa.
Elsewhere in Japan’s credit markets, Bridgestone Corp. sold 30 billion yen ($305 million) of three-year, 0.247 percent notes and 20 billion yen of five-year, 0.345 percent bonds, according to a statement yesterday from Daiwa Securities Group Inc. The yield premium of nine basis points for the longer securities compared with the 23 basis point spread on five-year debt the Tokyo-based tire maker offered in 2009, according to data compiled by Bloomberg.
Mitsubishi Electric Corp. registered to issue as much as 200 billion yen of bonds, according to a filing with Japan’s Ministry of Finance. It takes effect on April 25 and is valid for two years.
The extra yield that investors demand to own Japanese corporate notes rather than sovereign debt rose to 38 basis points yesterday after touching 37 on the previous day, matching the lowest level since August 2011, according to Bank of America Merrill Lynch index data. The spread for company bonds worldwide was 145 basis points, or 1.45 percentage points.
Five-year credit-default swaps to insure Japan’s sovereign debt were at 68.7 basis points yesterday after declining to 67.5 on April 16, the lowest level since March 20, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The contracts were as high as 154 last year. A drop in the swaps signals improving perceptions of creditworthiness, while an increase suggests the opposite.
Gross at Newport Beach, California-based Pimco said in a Bloomberg Television interview on April 4 that the BOJ’s 2 percent inflation target is a “high bar to reach” and the two-year time frame may be “unrealistic.”
Iwata, the former BOJ deputy chief, said it’s “impossible” to meet the deadline. Even five years won’t be easy, Iwata, who now serves as the president of the Japan Center for Economic Research, said in an interview last month.
An economist that taught Kuroda at Oxford University is among the skeptics. Nobel Laureate James Mirrlees said in Beijing yesterday he’s unsure the central bank will achieve its objectives and that main impact will probably be higher share prices.
The International Monetary Fund agrees with Kuroda that his monetary stimulus can benefit the economy. It doubled Japan’s fiscal 2014 growth forecast to 1.4 percent from its January projection. The Washington-based fund said in its World Economic Outlook report that the BOJ’s stimulus will help boost inflation.
Japan’s central bank is considering raising its inflation forecast in its next outlook report due for release on April 26, said people familiar with the BOJ’s discussions. It may upgrade its view on price gains excluding fresh food to at least 1.5 percent from 0.9 percent for fiscal 2014, according to the people, who asked not to be identified because the talks were private. The so-called core inflation rate slid 0.3 percent in February from a year earlier.
The yen has dropped about 19 percent against the U.S. dollar in the past six months, the biggest loser among 31 major currencies. It touched 99.95 per dollar last week, the weakest in four years, and traded at 98.23 as of 1:14 p.m. in Tokyo. The Topix Index of shares has surged 51 percent since Oct. 18.
“Although the yen has depreciated by a large amount over the recent past, we think the monetary policy followed by the BOJ is appropriate,” IMF Chief Economist Olivier Blanchard said on April 16. “It is a logical consequence of appropriate monetary policy.”
A Ministry of Finance sale of 1.1 trillion yen of 20-year bonds today drew bids valued at 3.68 times the amount available, the strongest demand since October, according to ministry data. The yield on the securities fell two basis points to 1.475 percent at 1:11 p.m. in Tokyo after the auction.
That contrasted with the April 11 offering of 30-year debt, which saw the widest gap on record between the average and lowest bidding prices, signaling weaker demand. The so-called tail at the April 16 offering of five-year notes increased to the most since June 2008.
Japanese investors reduced their holdings of foreign debt by 331.9 billion yen in the week ended April 12, the fifth week of sales, separate Ministry of Finance data showed today.
Kuroda told lawmakers this week that the BOJ has a future exit strategy in mind while saying it’s too early to discuss the specifics of such a plan. Policies may include raising benchmark borrowing costs or the interest rate on excess reserves, he said. The central bank now buys the equivalent of 70 percent of government bonds issued.
“The BOJ’s success in achieving 2 percent inflation in about two years hinges on whether it can keep yields low,” said Akito Fukunaga, the chief rates strategist in Tokyo at RBS Securities Japan Ltd., a unit of Royal Bank of Scotland Group Plc. “The BOJ has no choice but to keep buying government bonds.”