Kuroda Faith Waning Halts Deals as Forecasts Blown: Japan Credit

Bank of Japan Governor Haruhiko Kuroda’s stimulus policies pushed bond yields above analyst forecasts for the first time since at least July as the widest price swings in a decade halted two debt offerings.

Benchmark 10-year Japanese government bond yields reached 0.92 percent yesterday, the highest since April 2012. That put the rate above the 0.7 percent year-end forecast by analysts in a Bloomberg News survey. The rate later pared gains after the central bank announced a 2.8 trillion yen ($27.4 billion) infusion of funds. Analyst forecasts for 10-year Treasury yields are at 2.2 percent compared with the current 1.93 percent.

Kuroda’s doubling of bond purchases last month to achieve 2 percent inflation in two years has failed to cap borrowing costs, with the 10-year yield rising the most since August 2003 in the three sessions through May 14. Toyota Industries Corp. joined Lixil Group Corp. in canceling debt sales this week due to market volatility, casting doubt on the BOJ’s plan to boost investment and growth by keeping borrowing costs low.

“It’s probably not realistic for the BOJ to think that it can keep bond yields low despite monetary easing aimed at 2 percent inflation because it buys” lots of JGBs, said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Co. That’s “contradictory,” he said.

Volatility Swing

The swing between high and low 10-year JGB yields on April 5, the day after the BOJ expanded stimulus, was 30 1/2 basis points, the widest since July 2003. The benchmark rate surged 25 1/2 basis points, or 0.255 percentage point, in the three sessions ending May 14, the steepest three-day increase since August 2003.

“The BOJ’s operation is too infrequent and too big,” said Shogo Fujita, the chief Japanese bond strategist in Tokyo at Bank of America Merrill Lynch, one of the 24 primary dealers obliged to bid at government debt auctions. “The operation is so big that it threatens to break the market, and uncertainty on when it might happen is regarded as a risk.”

The central bank buys bonds about eight times a month for a total of at least 7 trillion yen, according to a statement last month.

Bond yields reversed an earlier gain yesterday as the BOJ offered 2 trillion yen of 0.1 percent, one-year loans to financial companies, adding to a regular injection of 800 billion yen. It separately bought government bonds for a third time this month with total purchases of 410.8 billion yen. Japan’s 10-year yield closed at 0.85 percent yesterday and was at 0.825 percent today, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker.

JPMorgan Samurai

Elsewhere in Japan’s credit markets, JPMorgan Chase & Co. registered to sell as much as 500 billion yen of Samurai bonds, according to a filing yesterday with the Ministry of Finance. The U.S. bank offered 161.5 billion yen of the yen notes in February 2012, according to data compiled by Bloomberg.

Samurais, which are yen-denominated bonds offered in Japan by overseas borrowers, have handed investors a 0.26 percent loss this month, according to Bank of America Merrill Lynch data. That compared with a 1.5 percent drop for Japanese government notes and a 0.58 percent decline for domestic company paper.

The yen traded at 102.24 per dollar as of 12:54 p.m. in Tokyo after yesterday touching 102.76, the weakest since October 2008. Japan’s currency has lost 21 percent in the past six months, the worst performance among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes.

Bond Auction

The five-year yield yesterday jumped as much as 5 1/2 basis points to 0.455 percent yesterday, a level unseen since May 2011. It fell 2 1/2 basis points to 0.39 percent today after a Ministry of Finance auction of about 2.5 trillion yen of the notes showed the strongest demand in three months. The sale drew bids valued at 3.39 times the amount available, according to the ministry’s data.

Japanese investors bought a net 186.4 billion yen of foreign bonds in the week ended May 10, the third straight week of purchases, separate ministry data showed. Overseas investors sold 413.5 billion yen of Japanese debt last week, the largest net sale amount since the week ended March 22, the data showed.

Lenders in Japan held 163 trillion yen of government bonds in February, or 19 percent of their total assets, according to the latest data from the BOJ. In dollar terms, that’s about the same as the combined annual economic output of South Korea and Taiwan. The proportion was 10.5 percent a decade ago.

‘Bond Standard’

“Japan’s financial system is based on the bond standard, as the securities make up a large portion of bank assets,” said Satoshi Yamada, a manager of debt trading in Tokyo at Okasan Asset Management Co., which oversees the equivalent of $11 billion in assets. “A big rise in bond yields would negatively affect financial markets and the economy.”

Toyota Industries canceled a 20 billion yen sale of seven-year and 10-year securities because of market volatility, according to an e-mailed statement from Nomura Securities Co. yesterday. Lixil, a supplier of aluminum doors and windows, also called off plans to sell seven-year and 10-year notes, citing “sudden market changes,” according to a Mitsubishi UFJ Morgan Stanley Securities Co. statement on May 14.

JFE Holdings Inc., Japan’s second-biggest steelmaker, delayed a plan to sell 10-year bonds, according to a person familiar with the matter.

U.S. Recovery

Signs of an improvement in the U.S. economy are sending yields on Treasuries higher, attracting flows from Japanese money managers. The 10-year rate reached 1.985 percent yesterday, a level unseen since March 15.

Employers in the U.S. added an average of about 196,000 workers in the first four months of 2013. Growth in the world’s biggest economy is seen at 2 percent this year, outpacing an expansion of 1.4 percent in Japan, according to median analyst estimates compiled by Bloomberg.

Japan’s first-quarter gross domestic product increased an annualized 3.5 percent, compared with 1 percent growth in the last quarter of 2012, the Cabinet Office said today. Economists in a Bloomberg News survey estimated a 2.7 percent expansion.

“Yields are rising, not just in Japan but in other nations as risk appetite improves after stronger U.S. jobs data,” said Naomi Muguruma, a Tokyo-based senior fixed-income strategist at a Tokyo-based senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley.

Mitsubishi UFJ, which predicted the 10-year JGB yield would range from 0.3 percent to 0.65 percent in the fiscal year ending March 31, may revise up its forecast this week, according to Muguruma.

The BOJ will meet on May 21-22 after Kuroda’s policy board decided last month to double in two years the monetary base, which is total money in circulation plus reserve deposits at the central bank. Kuroda said last week government bond yields will rise if economy improves.

“BOJ policy has become more unpredictable,” said Muguruma. “As BOJ purchases drains liquidity in the market, there’s a risk that the bond buying can backfire.”

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