Grandmas Wary of Inflation Sold Floating-Rate JGBs: Japan Credit

Japan’s government is seeking to reassure the world’s oldest population that sovereign debt can withstand inflation by selling more floating-rate bonds.

A record 5.19 trillion yen ($51 billion) of bonds sold to households, including those with coupons that change according to market rate, mature this fiscal year, with women in their 60s and 70s the biggest buyers, according to the Ministry of Finance. The government switched to monthly sales of floaters this year from every three months previously and raised 1.29 trillion yen in the first four months of this year, close to the total sales of 1.43 trillion yen in 2013.

Rising demand for the debt suggests Bank of Japan Governor Haruhiko Kuroda is succeeding in his effort to boost consumers’ expectations for higher prices and end 15 years of deflation. Eighty percent of households said the cost of living is likely to increase in the coming year, according to the BOJ opinion survey taken from Feb. 6 to March 4 and released on April 2.

Elderly investors, “who have experienced inflation, are buying retail JGBs,” Takahiro Niimi, a researcher in Tokyo at NLI Research Institute, an affiliate of Nippon Life Insurance Co., Japan’s biggest life insurer, said by phone on April 10. “They tend to be more sensitive to inflation than those who are 40 years or younger. Floaters may have a certain appeal.”

Older Buyers

About 30 percent of those who bought 10-year floaters in December were women in their 60s and 70s, according to MOF data. Men in the same age group made up about 20 percent. A quarter of Japan’s population will be over 65 years old by the end of this year. That’s the highest ratio globally, according to U.S. census bureau figures compiled by Bloomberg.

“We are targeting a relatively older crowd and we want to entice individuals to reinvest when their holdings mature,” Tomohiko Kihira, who was the director of debt management at the MOF until March 31 and now works in the asset-liability management office in the Fiscal Investment and Loan Program division, said in an interview on March 28. “There have been some encouraging signs in the first two months since we started monthly issuance of 10-year floaters.”

The ministry is considering running an advertising campaign this fiscal year.

The MOF plans to sell 2.5 trillion yen of debt to individuals in the 12 months started April 1, up from 2.4 trillion yen in fiscal 2013. Nomura Holdings Inc., Japan’s biggest brokerage, is seeking to boost sales of retail JGBs this month by offering cash rebates on purchases as low as 500,000 yen.

Banks Sell

The government is selling variable-rate bonds to households at the time when institutional investors are turning away from low domestic yields. Lenders held 132 trillion yen of sovereign debt at the end of February, down more than 20 percent from a record in March 2012, the BOJ data show.

“Banks have reduced JGB holdings as much as they can, so there are plenty of investors wanting to re-enter the market once yields start rising,” Makoto Yamashita, the chief Japan rates strategist at Deutsche Securities Inc. said in an interview Tokyo on April 10. “Individuals may choose floaters.”

Deutsche Bank AG’s brokerage unit sees a risk that Japan’s benchmark 10-year rate will surge to 1.5 percent in the fourth quarter as the yen weakens and wages and consumer prices rise sustainably. That is almost double the average forecast of analysts surveyed by Bloomberg at 0.8 percent.

The benchmark yield was at 0.605 percent on April 11. It tumbled to a record 0.315 percent on April 5, 2013 and has stayed at or below 1 percent since then. The yen was little changed at 101.61 against the dollar as of 8:15 a.m. in London.

Inflation Protection

“There’s demand for floating-rate bonds from individuals who think yields have bottomed and cannot fall any further,” the MOF’s Kihira said. “Abenomics aims to boost inflation, so some may think that yields will rise along with the cost of living,” he said in reference to Prime Minister Shinzo Abe’s economic plan.

BOJ easing is having the intended effect and Japan is smoothly following the path to its 2 percent inflation target, Governor Kuroda said on April 1. While he refrained from taking any extra step at a meeting last week, four of the 36 economists in a Bloomberg News survey predict the central bank will add to stimulus when it meets again on April 30.

Abe told associates that he plans to meet with Kuroda to discuss monetary policy, the Wall Street Journal reported, citing people familiar with the matter.

The breakeven rate, which reflects bond investors’ expectations of future inflation, signaled a 1.33 percent consumer price increase in the coming decade.

Low Coupon

Kihira said one challenge when selling floating-rate bonds is their low initial payout. The latest coupon of 0.4 percent for the 10-year, variable-rate bond is lower than 0.55 percent for the notes issued in April 2004.

Individual holdings have fallen to 21 trillion yen in December 31 from 36.7 trillion at its peak in 2008, according to the finance ministry data. The ratio of retail investors was 2.2 percent while those of financial institutions including banks, life insurers and mutual funds was 61 percent. Pension funds held 3.4 percent and the BOJ 19 percent.

“A diverse investor base helps stabilize the market because having it concentrated in one group raises the risk of yields moving in one direction regardless of economic conditions,” the MOF’s Kihira said. “The proportion held by domestic financial companies has changed slightly since the BOJ’s unprecedented easing, but that of individuals has not grown to fill the gap as their capital still remains in bank deposits. We’d like for households to buy more.”

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