World’s Worst Bonds Brace for Losses on Abe Growth: Japan CreditMayumi Otsuma
Prime Minister Shinzo Abe’s stimulus probably helped the Japanese economy grow the most in a year, adding to pressure on 2013’s worst-performing bond market.
Gross domestic product likely expanded an annualized 2.7 percent in the three months through March, according to the median forecast in a survey of 36 economists before data tomorrow. Japanese bonds declined 14.5 percent in dollar terms this year, versus a 0.4 percent loss in Treasuries and a 1.9 percent drop in German bunds, indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies show. Inflation expectations rose to the most since at least 2009.
Abe’s push for monetary and fiscal stimulus to overcome more than a decade of deflation is invigorating demand among consumers, as a 46 percent surge in the Topix Index of shares this year boosts confidence. The economic rebound is also spurring expectations that consumer prices will increase as the yen tumbles, causing bond yields to surge in spite of a doubling of debt purchases under Bank of Japan Governor Haruhiko Kuroda.
“Consumer sentiment is improving and consumption is gathering steam at an unexpectedly rapid pace, becoming a locomotive for Japan’s economic rebound,” said Hiroaki Muto, a senior economist in Tokyo at Sumitomo Mitsui Asset Management Co., which manages the equivalent of $101 billion in assets. “If the GDP data show a very strong expansion, that’s bad news for Japan’s bond market.” He predicts 2.9 percent annualized growth.
Abe, who came to power in December, budgeted an extra 10.3 trillion yen ($101 billion) in fiscal spending. Kuroda’s BOJ policy board decided last month to double debt buying to more than 7 trillion yen a month to achieve 2 percent inflation in two years.
The measures are aimed at supporting the world’s third-largest economy, which has suffered through three technical recessions in the last five years. Abe is also trying to end more than a decade of persistent price declines that have weighed on consumer demand.
Japanese government bonds have tumbled this week amid speculation he may succeed. Benchmark 10-year yields touched 0.92 percent today, the highest since April 2012. The rates later pared gains to trade at 0.855 percent after the BOJ announced a 2.8 trillion yen infusion of funds. The yields soared 25 1/2 basis points from May 10 to yesterday, marking the biggest three-day surge since August 2003.
Abe is also fueling the market’s inflation expectations, according to the breakeven rate, a measure of investors’ outlook for consumer prices. The gauge is signaling annual inflation of 1.85 percent over the next five years, the most on record going back to June 2009.
“The gains in bond yields reflect expectations of economic recovery in Japan and the U.S.,” said Kiyoshi Ishigane, a senior strategist at Mitsubishi UFJ Asset Management Co., which oversees more than $69 billion in Tokyo. “I expect the Japanese economy to improve going forward with an accelerated pickup in the U.S. and the delayed effects of the yen weakness.”
Ishigane forecast Japan’s 10-year yield may reach 1 percent this year.
Elsewhere in Japan’s credit markets, Lixil Group Corp. canceled a plan to sell 7-year and 10-year bonds, according to a statement yesterday from Mitsubishi UFJ Morgan Stanley Securities Co. The Tokyo-based housing material maker cited “sudden market changes” for the decision, the brokerage said.
Hokuriku Electric Power Co. offered 20 billion yen of 1.04 percent, eight-year notes, according to a statement from Mizuho Financial Group Inc. The utility based in Toyama, central Japan, sold 10-year debt paying 1.158 percent in February, according to data compiled by Bloomberg.
Japan’s corporate bonds have handed investors a 0.52 percent loss this month, compared with a 1.38 percent decline in the nation’s sovereign debt, according to Bank of America Merrill Lynch index data. Company notes worldwide have lost 0.68 percent.
Abe’s stimulus has helped weaken the yen by more than 20 percent against the dollar in the past six months, the most of 16 major currencies tracked by Bloomberg. It traded at 102.48 per dollar as of 4:27 p.m. in Tokyo, after falling to 102.62, the weakest since October 2008. A depreciating currency boosts the value of overseas income at Japanese exporters when repatriated and makes their products more competitive abroad.
Aggregate net income for the 166 companies on the Nikkei 225 Stock Average who have declared earnings for the three months ending March 31 rose to 1.78 trillion yen, a 45 percent increase on year, according to data compiled by Bloomberg.
Toyota Motor Corp.’s profit more than doubled to 314 billion yen last quarter, the world’s largest automaker said last week. The company estimates it earns about 40 billion yen every time Japan’s currency weakens by 1 yen against the dollar.
Gains in consumer spending are set to drive economic growth, with a private consumption index rising 0.9 percent in the first quarter compared with the previous three months. Consumer confidence in April is forecast to rise to the highest in almost six years.
Home purchases also supported growth in the first quarter. Housing starts rose for seven straight months through March, according to government data.
Bond prices may stabilize after this week’s plunge as the central bank pushes ahead with its purchases of the debt, according to Hiroshi Shiraishi, a senior economist at BNP Paribas SA in Tokyo.
“While the pace of Japan’s economic growth has quickened, driven mainly by the stimulus measures, bond yields will stay low on the BOJ’s strong monetary easing,” said Shiraishi, who projects an annualized 3.2 percent growth for the period.
Finance Minister Taro Aso said yesterday it’s “natural” for investors to shift funds to stocks as they rise, and that is behind the advance in bond yields. The Topix advanced 1.8 percent to 1,252.85 today, the highest close since August 2008.
Five-year credit-default swaps to insure Japan’s sovereign bonds were at 55 basis points yesterday after falling to 54 on May 13, 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 basis point is 0.01 percentage point.
The drop suggests there’s little concern in the market about the government’s finances even as public debt will probably expand to 245 percent of GDP this year, according to the International Monetary Fund’s estimate.
Living costs in Japan are far from rising to the BOJ’s 2 percent target. Consumer prices excluding fresh food fell 0.5 percent from a year earlier in March, marking the fifth straight month of declines, government data showed last month.
“In their hearts, Prime Minister Abe and government officials might not really want to see inflation rising to the BOJ’s goal because that runs the risk of driving up bond yields,” said Sumitomo Mitsui Asset Management’s Muto. “A jump in interest rates could bankrupt the nation’s finances.”