Japan to Resume Inflation Bond Sales in October With Guarantee

Japan’s government plans to sell inflation-linked bonds in October, resuming issuance after a five-year hiatus and signaling Prime Minister Shinzo Abe’s resolve to spur growth in consumer prices and the economy.

The government will have two offerings worth 300 billion yen ($3.16 billion) each in 10-year securities known as linkers, with the second taking place in January, according to Ministry of Finance officials who spoke on condition of anonymity, elaborating on plans to reissue the securities announced earlier this year. The notes will have guaranteed minimum prices, a backstop that previously issued linkers didn’t have, leaving them vulnerable to price declines as deflation deepened.

Japan stopped offering the notes in August 2008 because of falling demand amid deflation. Holders of the older inflation-linked bonds receive an adjustment to the principal value equal to the change in the inflation rate.

The auction date in October will be announced in late July, the officials told reporters in Tokyo. There has been strong interest for the securities from overseas investors and demand from domestic investors is also increasing amid potential risk of future inflation, the officials said.

Japan’s breakeven rate, derived from the difference between government bond yields and those on inflation-linked debt, signaled inflation of 1.31 percent in the next five years, down from as high as 1.84 percent on May 15.

Falling Yield

The yield on Japan’s benchmark 10-year note dropped four basis points to 0.815 percent today in Tokyo. That brought its weekly decline to 4 1/2 basis points, the most since the period ended April 5.

Prime Minister Abe has pledged to defeat 15 years of entrenched deflation and spur growth in the world’s third-largest economy using a combination of fiscal and monetary stimulus.

A majority of the primary dealers at the meeting said volatility in the bond market is high, while most institutional investors said the fluctuations have lessened somewhat, according to ministry officials.

The ministry exchanged opinions with primary dealers and institutional investors on selling the 10-year and 20-year notes with pre-determined coupons rather than adjusting them to market rates if they carry the same due date, according to the officials. The plan has emerged since the Bank of Japan doubled monthly bond purchases in April, driving up market volatility to the highest in more than four years.

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