Kuroda Put Prompts Japan Banks to Shift to Longer BondsMasaki Kondo, Mariko Ishikawa and Shigeki Nozawa
Japan’s largest lenders are shifting their debt portfolios to longer-maturity sovereign notes, seeking to squeeze out higher returns and betting that central bank buying will shield them from potential losses.
So-called city banks including the Bank of Tokyo-Mitsubishi UFJ Ltd. and Mizuho Bank Ltd. boosted holdings of Japanese government bonds maturing in 10 years for a record fifth-straight month in September, while selling notes due in two to five years, data released yesterday from the Japan Securities Dealers Association showed. Five-year JGBs yielded 0.205 percent today, while the 10-year rate was 0.615 percent, versus 2.6 percent for U.S. Treasuries due in 2023.
Longer-term JGBs have outperformed shorter notes since May, a month after Bank of Japan Governor Haruhiko Kuroda more than doubled the average maturity of debt the central bank buys as part of its stimulus. Bank of America Corp. said the BOJ stands ready to increase stimulus should the economic recovery falter, a backstop it and other banks have called the Kuroda Put.
“JGB investors feel the urge to stay in the market as the BOJ stuffs its face with bonds,” said Makoto Noji, a Tokyo-based senior debt strategist at SMBC Nikko Securities Inc., one of the 23 primary dealers obliged to bid at government debt sales. Because of their low yields “it’s no use for banks to buy medium-term notes,” he said.
The BOJ introduced an unprecedented bond-buying program on April 4 under which it buys more than 7 trillion yen ($71 billion) of government bonds with an average maturity of about seven years. About half the purchases will be allocated to debt maturing in five years or less, the BOJ said in May.
The city banks scooped up a net 1.24 trillion yen of 10-year notes in September, bringing total purchases since the end of April to 3.17 trillion yen, the JSDA figures showed. They last month bought 110.4 billion yen of JGBs maturing in 20 years or longer, the most since July 2012.
In contrast, the nation’s biggest lenders remained net sellers of two- to five-year notes from February to September, offloading 11.3 trillion yen during the period, the JSDA report showed.
JGBs maturing in more than 10 years have returned 3.4 percent since the end of May, compared with a 1.1 percent gain in one- to 10-year securities, according to data gathered by Bloomberg and the European Federation of Financial Analysts Societies.
Government data will probably show on Oct. 25 that nationwide consumer prices excluding fresh food rose 0.7 percent last month from a year earlier, according to the median forecast of economists surveyed by Bloomberg News. The rate, the BOJ’s favored measure of inflation, advanced to 0.8 percent in August, the fastest pace since November 2008.
An auction of 1.1 trillion yen in 20-year debt today attracted bids valued at 4.34 times the amount available, the highest ratio since September last year, according to Ministry of Finance data. Yields on similar-maturity JGBs fell to 1.47 percent after the sale, the lowest since May 2.
The nation resumed offering 10-year inflation-linked securities on Oct. 8 after a five-year hiatus. The difference in yield between 10-year nominal debt and linkers, which signals investor expectations of future inflation, was 0.99 percentage point today.
“We have to take into account the possibility of faster inflation over the long term,” said Tadashi Matsukawa, the head of fixed-income investment in Tokyo at PineBridge Investments Japan Co., which manages about $1.1 billion in bonds. “Baby boomers are continuing to retire. The decreasing number of workers means a lack of labor, which makes wages more likely to rise.”
More than 70 percent of economists in a Bloomberg poll forecast that Kuroda will add to stimulus in the first half of next year. Meanwhile, Prime Minister Shinzo Abe’s administration will compile a 5 trillion yen economic package in December to offset damage from an increase in the sales tax in April to 8 percent from 5 percent. The consumption levy is scheduled to increase further to 10 percent in 2015.
“The Bank of Japan has already made a commitment to take action should the fears of the tax hike’s damage to the economy be borne out,” Bank of America Merrill Lynch strategists Shogo Fujita and Shuichi Ohsaki wrote in a report this month. “It seems safe to assume that such action would be along the lines of the ‘Kuroda put.’”
Outstanding bank loans in Japan climbed in September to the highest since April 2009, BOJ data showed. Demand among companies to borrow rose in October, according to a survey released by the central bank today.
Even so, growth in customer deposits has outpaced lending, staying near a record high last month and giving the financial firms excess funds to invest in government debt.
“Since there is limited scope for growth in lending, banks have no other choice but to buy JGBs, even if yields are low,” said Toru Yamamoto, the chief strategist at Daiwa Securities Co., a primary dealer. “Banks have to go up the yield curve in search for higher returns.”
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