Swaps Near Six-Month Low as Quake Sparks Recession: Japan Credit
May 17, 2011, 9:53 PM EDTBy Monami Yui and Aki Ito
May 18 (Bloomberg) -- Three-year interest rate swaps in Japan slumped to a six-month low as the nation’s record earthquake and nuclear crisis depressed the economy more than analysts anticipated.
The fixed rate traders pay to receive floating payments for three years declined to 0.396 percent last week, the lowest level since Nov. 4, and traded at 0.407 percent today. Four-year and five-year equivalents are also at about six-month lows.
A report tomorrow may show gross domestic product shrank in the first quarter at the fastest pace since the financial crisis, pushing the economy into a recession and bolstering the case for the Bank of Japan to keep monetary stimulus in place, according to the median estimate of analysts surveyed by Bloomberg. Surveys show the central bank’s governors will probably keep interest rates near zero and maintain credit programs when they meet this week, even as policy makers in Asia tighten and the European Central Bank unwinds stimulus.
“It’s becoming increasingly clear that the Bank of Japan is strengthening its commitment to an accommodative stance,” said Ayako Sera, a strategist in Tokyo at Sumitomo Trust & Banking Co., which manages about $331 billion in investments. “Out of all the central banks right now, it’s easiest to predict the Bank of Japan’s moves. Investors can comfortably assume that short-term rates won’t rise.”
Relative Value
Investors try to lock in rates when they expect borrowing costs to rise, causing swaps to increase. Three-year interest rate swaps in Germany have increased to 2.52 percent from 1.93 percent in the past six months after accelerating inflation prompted the ECB to increase its policy rate in April for the first time in almost three years. The U.S. equivalent has risen to 1.17 percent from 1 percent in the same period as bets on further easing by the Federal Reserve fade.
The world’s third-largest economy probably contracted for a second quarter, pushing it into a technical recession in the three months ended March 31. GDP shrank at an annual 1.9 percent pace, according to the median estimate of 23 economists surveyed by Bloomberg News before the report tomorrow.
A decline of that magnitude would be bigger than the 0.2 percent pace forecast by analysts polled by a government- affiliated think tank between March 29 and April 5. Industrial production tumbled a record 15.3 percent in March, retail sales slumped 8.3 percent and exports slid 2.3 percent -- all drops that were bigger than economists expected.
Plant Closure
Data this month indicate the economy hasn’t bounced back. Consumer confidence slumped at a record pace in April, the Cabinet Office said this week, after the quake left more than 24,000 dead or missing. Exports for the first 20 days of April slid 12.7 percent from a year earlier, the Finance Ministry said on May 12.
Service demand fell 6 percent in March from a month earlier, marking the largest decline since April 1989, the Trade Ministry said today in Tokyo. The slump was led by spending declines on entertainment and restaurants.
The closure of a nuclear plant that supplies power to the region in which Toyota Motor Corp. is based may force companies to restrain output this quarter, delaying the rebound. Chubu Electric Power Co. shut its Hamaoka nuclear plant after Prime Minister Naoto Kan this month ordered the utility to bolster its tsunami defenses in wake of the nuclear accident in Fukushima at a Tokyo Electric Power Co. complex.
“This is one more thing that’s going to slow the economic recovery,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. “You would have thought that we would have seen more progress by this point. All this news that adds to uncertainty in the outlook is prompting investors to recalculate their interest rate expectations.”
Borrowing Yen
Investors may take advantage of the diverging prospects at central banks by borrowing in yen at Japan’s low rates, and then exchanging that to foreign currencies to buy higher-yielding assets, according to Makoto Noji, a Tokyo-based senior debt and foreign-exchange strategist at SMBC Nikko Securities Inc.
Japan’s currency crossed below 80 per dollar on May 5 for the first time since Group of Seven nations intervened in markets on March 18 to weaken the yen, and traded at 81.37 per dollar as of 10:28 a.m. in Tokyo today.
“The Bank of Japan has no choice but to keep its monetary stimulus in place,” Noji said. “It’s hard to be upbeat about the economic outlook at this point.”
There are also signs the economy is on the mend and will rebound as reconstruction work kicks in and companies start to repair factories. Machinery orders, an indicator of future capital spending, unexpectedly increased in March and companies said orders will rise this quarter. Economic and Fiscal Policy Minister Kaoru Yosano also said the disaster effect on output was “smaller than first thought.”
Nissan Forecast
Nissan Motor Co. now forecasts that its global production will return to normal levels by October. Fewer than 20 suppliers are still in a critical situation compared with 40 in March, Chief Executive Officer Carlos Ghosn said this month.
The BOJ will probably keep the key rate in range of zero to 0.1 percent and maintain its 10 trillion-yen asset and 30 trillion yen credit programs, according to all 13 analysts surveyed by Bloomberg News. The two-day meeting ends May 20. Deputy Governor Kiyohiko Nishimura proposed last month expanding the bank’s asset-buying fund to shore up growth, a proposal rejected by the board.
Japan’s benchmark 10-year yield slid to 1.105 percent this week, the lowest level since Nov. 24, amid signs of a prolonged economic slowdown.
“It’s still unclear whether Japan will ever be able to return its pre-quake economic capacity,” said Akio Kato, team leader for Japanese debt in Tokyo at Kokusai Asset Management Co., which runs the $32.5 billion Global Sovereign Open fund. “Short-term interest rates have already been crushed, but factoring in those growth expectations, long-term interest rates may edge down as well.”
--With assistance from Mayumi Otsuma, Masahiro Hidaka and Theresa Barraclough in Tokyo. Editors: Lily Nonomiya, Patrick Chu
To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Aki Ito in Tokyo at aito16@bloomberg.net
To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net
