Moody’s Ignored as Abe Tax Outlook Cuts Bond Risk: Japan CreditJames Mayger and Chikako Mogi
The bond market is showing confidence in Japanese Prime Minister Shinzo Abe’s tax plans, ignoring a warning from Moody’s Investors Service that a watered-down sales levy increase could hurt the nation’s credit.
The cost to insure Japanese government bonds for five years fell 18 basis points since the end of June to 59 basis points last week, the lowest since May 15, according to data provider CMA. Equivalent credit-default swaps for U.S. Treasuries dropped 6 to 21 during the period. Benchmark 10-year JGB yields were at 0.765 percent today, the lowest in the world.
Bonds held gains even as Moody’s said that lax fiscal discipline in the world’s most indebted country could erode market confidence in Japan’s finances. Abe has said he will study economic growth data due on Sept. 9 to decide whether to proceed with a planned 3 percentage point boost in the sales tax in April, and his deputy, Taro Aso, said last week that gross domestic product figures supported the case for an increase.
“The JGB market is a domestic market and reflects the Japanese consensus, which is that the consumption tax hike won’t be derailed,” said Shogo Fujita, the chief Japanese bond strategist in Tokyo at Bank of America Merrill Lynch. “Since they believe the tax hike will be passed, they aren’t worried.”
Japan’s default-swaps have come down from as high as 155 basis points in October 2011, according to CMA data. JGBs have handed investors a 0.4 percent gain since the end of June, compared with a 1.2 percent loss for Treasuries, according to Bank of America Merrill Lynch data. A basis point is 0.01 percentage point.
Abe will study Japan’s revised GDP for the quarter ended June 30 before deciding whether to increase the sales tax rate to 8 percent in April and 10 percent in 2015, from 5 percent. Preliminary data last week showed an annualized expansion of 2.6 percent from the previous quarter, a slowdown from the prior three months and trailing analyst forecasts.
The prime minister must decide whether the world’s third-largest economy can withstand the higher taxes. Japanese Economy Minister Akira Amari said last month that a panel of experts will analyze the issue.
Abe adviser Etsuro Honda said that the levy ought to be increased by 1 percentage point a year instead of the current plan. Japanese lawmakers are reluctant to reopen legislation on the issue, he said in an interview this month.
“Things are very serious indeed when you have a government bond market that is utterly unfazed by news that the needed consumption tax hike might be in jeopardy,” Ryutaro Kono, the chief Japan economist at BNP Paribas SA wrote in a research report earlier this month. The Bank of Japan’s “overwhelming” purchases of government debt mean that “bond prices no longer reflect news regarding economic fundamentals,” he wrote.
Elsewhere in Japan’s credit markets, Sapporo Holdings Ltd. registered to sell as much as 50 billion yen ($512 million) of notes, according to a filing with the Finance Ministry on Aug. 16. The Tokyo-based beverage producer last offered five-year, 0.39 percent debt in March, according to data compiled by Bloomberg.
Japanese corporate bonds have returned 0.3 percent since the end of June, compared with a 0.05 percent decline for company notes worldwide, Bank of America Merrill Lynch index data show.
The yen weakened 0.1 percent to 97.67 per dollar as of 4:02 p.m. in Tokyo, after depreciating 1.4 percent last week. The currency has fallen 8.9 percent this year, the worst performance after the Australian dollar among the 10 developed-market currencies tracked by the Bloomberg Correlation Weighted Indexes.
Japan’s imports climbed 19.6 percent from a year earlier in July, the biggest increase since 2010, the Ministry of Finance said today. That left a trade deficit of 1.024 trillion yen.
The nation’s debt exceeded a quadrillion yen as of June 30, according to the Finance Ministry. Liabilities will reach 248 percent the size of economic output next year, the most in the world, the International Monetary Fund estimates.
Moody’s, which has an Aa3 rating on Japan with a stable outlook, said on Aug. 15 that “delaying or watering down” the sales tax plan would be “credit negative” because the government has yet to unveil significant steps to reduce its deficits.
“The growth momentum is easing at this really early stage of Abenomics,” Thomas Byrne, a senior vice president at Moody’s, said last week in an interview on Bloomberg Television. Japan might not be able to sustain the 2 percent GDP growth it needs at minimum to stabilize its debt trajectory, he said.
Japan’s Rating & Investment Information Inc. said it plans to cut its outlook on the nation’s AA+ grade to negative from stable if the tax increase is delayed or the increment is narrowed. The country’s rating may still be under pressure even if the levy is changed as scheduled if the government doesn’t improve its fiscal management, it said last week.
The BOJ has helped support the JGB market since April by buying more than 7 trillion yen of notes a month, to try to fuel 2 percent inflation in two years. BOJ Governor Haruhiko Kuroda said on Aug. 8 that restoring Japan’s fiscal health is “absolutely necessary,” and that a loosening of fiscal measures could hurt monetary policy.
“Bond investors are buying even if they worry that yields will eventually rise as the economy improves and consumer prices go up,” said Mari Iwashita, a senior market economist at SMBC Nikko Securities Inc. “Everyone is aware of the risk that volatility could explode if market stability breaks down.”