BOJ Target at Risk as Spreads Show Tame G-7 Prices: Japan CreditMasaki Kondo, Mariko Ishikawa and Shigeki Nozawa
Bank of Japan Governor Haruhiko Kuroda’s biggest obstacle to ending deflation may be beyond his control, judging by the lowest premium in two decades on developed-nation debt over Japanese bonds.
The extra yield on Group of Seven nations’ notes over Japan’s narrowed to 61 basis points last week, the lowest since 1990, according to Bank of America Merrill Lynch index data. While central banks in G-7 countries keep borrowing costs at record lows and maintain unprecedented stimulus, consumer-price increases have lost momentum in most of those economies.
The BOJ affirmed its stimulus plan today after a two-day meeting as slowing price gains abroad highlight the challenge Kuroda faces in ending more than a decade of deflation. Economists in a Bloomberg News survey forecast Japan’s consumer prices will rise by less than 0.5 percent by the end of this year, even after policy makers pledged to fuel 2 percent inflation in two years by doubling monthly debt purchases.
“When there appear to be signs of disinflation worldwide in this globalized economy, it’s very difficult for Japan to go in the opposite direction and have 2 percent inflation,” said Shuntaro Take, the deputy general manager for the corporate accounting and investment department at Tokio Marine & Nichido Life Insurance Co., which manages about $38 billion in Tokyo. “The world’s economy lacks vigor.”
The U.S., the U.K., Canada and France reported slowing inflation this month. The G-7 consists of those countries and Germany, Italy and Japan.
The BOJ forecasts Japan’s consumer prices excluding fresh food will rise 0.7 percent in the year started April 1. The projection is based on the assumption that growth in overseas economies, including the U.S., will gradually pick up, according to a report by the central bank released on April 26.
The world’s major economies are running below their full capacity, according to data from the International Monetary Fund. The so-called output gap, a measure of the difference between actual and potential gross domestic product, will be negative 4.4 percent in the U.S., negative 1.2 percent in Japan and negative 0.6 percent in Germany, the IMF forecasts.
“The root cause of the global disinflation is the large negative output gaps of developed economies,” said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo. “The labor market is struggling to improve, and wage growth is sluggish.”
The BOJ will probably have to add to monetary easing as early as October, he said. The central bank’s price forecasts that month will indicate the degree of progress that it has made toward its inflation target.
Elsewhere in Japan’s credit markets, Softbank Corp., the Tokyo-based carrier bidding to take over Sprint Nextel Corp. in a $20.1 billion deal, plans to sell 400 billion yen ($3.9 billion) of bonds targeting individual investors to fund the purchase, according to a filing with the Ministry of Finance yesterday. The company offered 300 billion yen of 1.47 percent, four-year notes to individuals in February, data compiled by Bloomberg show.
Isetan Mitsukoshi Holdings Ltd. offered 10 billion yen of five-year, 0.594 percent debt, according to a statement yesterday from Mitsubishi UFJ Morgan Stanley Securities Co. The Tokyo-based department-store operator last offered similar-maturity notes in 2010 that paid 0.97 percent, data compiled by Bloomberg show.
Japan’s corporate bonds have handed investors a 0.52 percent loss this month, compared with a 1.67 percent decline for the nation’s sovereign debt, according to Bank of America Merrill Lynch data. Company notes worldwide have lost 0.57 percent during the period, the data show.
Kuroda’s stimulus spurred a stock rally and increase in inflation expectations that pushed up yields on benchmark 10-year reach 0.92 percent on May 15, the highest since April 2012. It fell 1 1/2 basis points, or 0.015 percentage point, to 0.865 percent today. Consumer prices excluding fresh food have fallen for the past four years in Tokyo, declining 0.3 percent last month from a year earlier.
Japan’s central bank will expand the supply of money in the economy by 60 trillion yen to 70 trillion yen a year, as pledged in April, the BOJ said in Tokyo today.
Its meeting will be followed by Fed Chairman Ben S. Bernanke’s testimony to Congress on the U.S. economic outlook later today. Investors are weighing when the Fed will reduce its monthly purchases of $85 billion of government and mortgage debt each month, the third round of policy known as quantitative easing, as signs of an improved U.S. job market contrast with a near-record low of inflation.
The European Central Bank cut the benchmark rate by a quarter percentage point to a record 0.5 percent this month. The Bank of England has an asset-purchase target of 375 billion pounds ($568 billion), while the Bank of Canada has kept borrowing costs at 1 percent since September 2010.
Inflation has yet to pick up in the major economies in spite of the monetary stimulus.
The U.S. core personal-consumption-expenditures index, the Fed’s preferred measure of inflation, rose 1.13 percent in March, near the 47-year low of 1.08 percent in December 2010. The all-time low was 1.06 percent in 1963. In the euro region, core consumer prices increased 1 percent last month, matching the slowest pace in three years.
While 10-year U.S. Treasury yields have risen about 32 basis points to 1.93 percent from this year’s low on May 1, that’s still below the five-year average of 2.78 percent. Rates on similar-maturity German debt were about 24 basis points from the lowest level since July.
In Japan, the BOJ’s stimulus has helped spur a yen decline of almost 20 percent in the past six months, with the currency touching 103.31 per dollar on May 17, the weakest since October 2008. A decline in the yen typically makes local exporters more competitive while increasing prices of imported goods. It traded at 102.50 per dollar at 12:21 p.m. in Tokyo today.
The Topix index of Japanese shares has surged 65 percent since November, the biggest winner among developed markets.
Market expectations of inflation have been rising, with the breakeven rate signaling annual price increases of 1.83 percent in the next five years, near the most on Bloomberg-compiled data going back to 2009. The equivalent figure for the U.S. has declined to 2.01 percent from 2.34 percent at the start of April. The gauges are derived from the difference between nominal bond yields and those on inflation-linked debt.
Demand declined at a sale of Japan’s 40-year debt yesterday as a higher inflation outlook made holding the debt less appealing. The 400 billion yen auction of the nation’s longest-maturity debt drew bids valued 2.64 times the amount available, the lowest since August 2011.
Japan’s real GDP expanded at a 3.5 percent annualized pace in the first quarter, the fastest rate in a year, government figures showed last week. The world’s third-largest economy will probably grow 1.4 percent this year, according to the median estimate of economists surveyed by Bloomberg News.
“We’ve come far in the stock rally, and the manufacturing industry has greatly benefited from the weakening yen,” said Masaru Hamasaki, a senior strategist at Tokyo-based Sumitomo Mitsui Asset Management Co., which oversees the equivalent of $100 billion. “These positive factors will steadily soak into the tips of the economy, and have a lagging impact on consumer prices.”