Abe Victorious in Japan Vote Has Least-Volatile BondsMasaki Kondo, Shigeki Nozawa and Yumi Ikeda
As he celebrates winning greater control over Japan’s government, Prime Minister Shinzo Abe can also take satisfaction in taming the world’s second-biggest sovereign debt market.
Sixty-day historical volatility in Japanese government bonds slid 91 basis points in the past month to 3.03 percent, the lowest among 25 markets tracked by Bloomberg and the European Federation of Financial Analysts Societies. All other sovereigns saw an increase in price swings as investors speculated on a possible exit from monetary stimulus by the U.S. Federal Reserve. The equivalent gauge for Treasuries jumped 1.1 percentage points to 4.86 percent.
Abe’s ruling coalition, which won a majority in the upper house election yesterday, needs to keep a lid on 10-year yields that reached a one-year high of 1 percent on May 23 because debt equals 245 percent of economic output. Bank of Japan Governor Haruhiko Kuroda tamed volatility by increasing the frequency of bond-buying operations and starting regular meetings with market participants.
“Higher volatility means a higher risk premium, which tends to drive up yields further than they really should be,” said Shinji Hiramatsu, a senior investment manager in Tokyo at Sompo Japan Nipponkoa Asset Management Co., which oversees the equivalent of $9.4 billion. “For the BOJ, economic growth and faster inflation are acceptable reasons for yields to rise, but the risk premium shouldn’t be.”
Abe’s Liberal Democratic Party and its New Komeito ally now have 135 of the 242 seats in the upper house, according to estimates by state broadcaster NHK. That gives the coalition control of both houses for the first time since 2007.
The BOJ doubled monthly bond buying to more than 7 trillion yen ($70 billion) in April, after Abe urged the central bank to take steps to overcome 15 years of deflation and achieve 2 percent annual price gains in two years. One year of purchases amount to more than half of the JGBs that the government plans to sell in the fiscal year started April 1.
JGB volatility peaked at a five-year high of 3.98 percent on June 25. It declined as the BOJ increased the frequency of its debt buying to about 10 times a month from 8 times, detailing the amounts and maturities of its intended purchases before the operations. The central bank also holds regular meetings with investors and traders, with the next gathering scheduled for July 24.
Kuroda said after a July 10-11 policy meeting that the BOJ’s bond purchases were lowering volatility and reducing risk premiums.
The yield on the benchmark 10-year note completed a two-week decline on July 19 for the first time since March 22, falling five basis points, or 0.05 percentage point, to 0.805 percent. The yield was at 0.785 percent today. That’s the lowest 10-year rate in the world, with Switzerland coming next at about 0.98 percent.
Elsewhere in Japan’s credit markets, Tokyo-based Sega Sammy Holdings Inc. sold 5 billion yen each of three-year, 0.493 percent notes and five-year, 0.732 percent bonds, according to data compiled by Bloomberg.
South Korea’s Shinhan Bank offered 30 billion yen of Samurai debt in two tranches, including 26.7 billion yen of two-year, 0.83 percent securities, according to a statement from Citigroup Inc. on July 19.
Japan’s corporate bonds have handed investors a 0.15 percent return this month, according to Bank of America Merrill Lynch index data. That compares with a 0.16 percent gain for Samurai notes, which are yen-denominated securities sold in Japan by overseas borrowers, and a 1.09 percent return on company debt worldwide.
The Ministry of Finance’s 1.2 trillion-yen sale of 20-year bonds on July 25 will serve as the first test of investor appetite for JGBs after the upper-house election. The previous auction on June 18 drew bids valued at 4.23 times the amount offered, the highest since September.
Abe’s economic policies, known as Abenomics, consist of what he calls the three arrows of monetary easing, fiscal stimulus and deregulation.
The premier “is not very dynamic on major structural reform,” Stephen Church, a partner at Tokyo-based JI Asia, said in an interview with Bloomberg Television on July 19. “Arrow three is a package of growth measures, and that is, I think it’d be fair to say, on the weak side.”
Abe must now decide whether to proceed with a scheduled doubling of the consumption tax rate to 10 percent by 2015. Decisions also loom on whether to cut the corporate tax burden, loosen labor regulations and restart nuclear reactors.
“This is crunch time for Abenomics,” Nicholas Spiro, the managing director at Spiro Sovereign Strategy in London, said in an e-mail. “The low-hanging fruit has already been picked. All eyes are now on the more politically contentious aspects of the program, notably the sales tax hike and the long-anticipated supply-side reforms.”
Abe reiterated today in Tokyo that he will decide in autumn whether to go ahead with the sales-tax increase.
Sixty-day price volatility for Treasuries maturing in more than a year accelerated after Fed Chairman Ben S. Bernanke said on June 19 that the U.S. central bank may curb its bond buying this year and end it in mid-2014 if economic growth is in line with Fed projections. The gauge rose to 4.88 percent on July 17, the highest since January 2012.
Ten-year yields in the U.S. will probably rise to 2.91 percent by the end of June next year from 2.51 percent, while Japan’s rates are expected to advance to 1.02 percent, according to weighted-average forecasts of analysts. Should those estimates prove correct, investors who bought 10-year Treasuries last week would lose 0.8 percent during the period, figures compiled by Bloomberg show.
“The BOJ’s buying is leading to the decline in both volatility and yields,” said Makoto Yamashita, the chief Japan rates strategist in Tokyo at Deutsche Securities Inc., one of the 23 primary dealers obliged to bid at Japanese government bond sales. “Markets see a very low likelihood that the BOJ can achieve its 2 percent inflation target within two years, so yields are likely to stay around the current levels.”
Ten-year yields may fall below 0.7 percent in September, he said.