Bloomberg News

Yields Reverse From ‘11 Low on Tankan Outlook: Japan Credit

July 03, 2011

July 4 (Bloomberg) -- Investors in Japan’s bond market joined leaders of the nation’s biggest companies in seeing an early recovery from a record earthquake.

The Bank of Japan’s Tankan index showed last week that large manufacturers expect the economy to be back on a growth path by next quarter. The government said the same day that inflation held at the fastest pace in more than two years in May and the unemployment rate unexpectedly declined.

Ten-year yields that touched the lowest in 2011 on June 28 reversed course to post the biggest weekly increase in almost three months. Bond prices may fall further as the domestic economy recovers and investors chase rising yields on U.S. Treasuries following the conclusion of the Federal Reserve’s $600 billion bond purchase program last month.

“The bond market has priced in bad elements for the economy, and it’s not easy for investors to continue to buy at current yields,” said Ayako Sera, a strategist at Sumitomo Trust & Banking Co. in Tokyo, which manages the equivalent of $310 billion. “While the pace may be slow, the effect of rebuilding will undoubtedly start to appear, pushing up the economy.”

The 10-year rate reached 1.085 percent last week, the least since November. Bonds fell the next three days, sending yields up 3.5 basis points on the week, the biggest increase since the period ended April 8. Sera expects 10-year yields to finish this year in a range of 1.3 percent and 1.4 percent.

The quarterly Tankan index of sentiment at large manufacturers fell to minus 9 in June from 6 in March, the Bank of Japan said on July 1, with the negative number meaning pessimists outnumber optimists. Companies see the index improving to positive 2 in September, the report showed.

Capital Spending

Large companies said they will boost capital spending 4.2 percent in fiscal 2011, exceeding analysts’ forecasts for a 2.4 percent increase. Profits at large manufacturers may surge 21 percent in the six months ending March 2012, the Tankan showed.

Bonds fell and the yen weakened last week as Greece passed an austerity package that helped it avert a default. Ten-year U.S. yields soared 29 basis points, the biggest increase since the five days ended Feb. 4, as the Fed completed its second round of quantitative easing. That pushed the yield advantage of 10-year U.S. debt to similar maturity Japanese notes to 2.03 percentage points as of 5:04 p.m. in Tokyo on July 1, the most since May 13.

Large manufacturers expect the yen will trade at 82.59 per dollar in the year through March 2012, the strongest projection since the BOJ began including the yen-forecast question in 1996. The stronger currency hurts exporters and is another roadblock for an economy reeling from the March 11 quake and tsunami that devastated the northern countryside and triggered the worst nuclear disaster since Chernobyl.

Yen Slide

The yen slid for a second week in the five days ended July 1, and reached 81.27 on June 28, the weakest since June 2. The currency surged to a postwar record of 76.25 in the days after the March temblor amid speculation domestic companies would repatriate assets to pay for damages the government estimates to be about 16.9 trillion yen ($207 billion).

Japan’s economy shrank at a 3.5 percent annualized pace in the three months through March, the second quarter of contraction, as consumer spending and corporate investment slumped in the aftermath of the quake.

A further 3 percent contraction is expected in the second quarter, before growth resumes in the second half of the year, according to the average forecast of 43 economists in a survey by the government-affiliated Economic Planning Association released on June 8.

Dealer Survey

Japan’s 10-year yields may climb to 1.35 percent by year- end, according to the median estimate in a Bloomberg News survey last week of 21 of the nation’s 24 primary dealers.

Consumer prices excluding fresh food rose 0.6 percent in May, the government said last week, matching the increase in April that was the first since December 2008. The unemployment rate fell to 4.5 percent from 4.7 percent in April, the statistics bureau said, while economists had forecast the rate would be 4.8 percent.

“Economic growth won’t remain negative indefinitely, but it will turn positive in the July-September period,” said Yuichi Onsen, who helps oversee the equivalent of $27 billion as chief strategist at T&D Asset Management Co. in Tokyo. “I expect bond yields to rise, although at a very slow pace.”

Europe’s lingering debt crisis and signs of slowing growth in the U.S. and China will support demand for Japanese bonds, said Shinji Kunibe, chief portfolio manager at Nissay Asset Management Corp. Tokyo. Data last week showed more Americans than forecast filed first-time applications for jobless benefits and a Chinese manufacturing index fell to the lowest level since February 2009.

Extra Budget

“The global economy probably won’t recover as much as people expect in the second half,” Kunibe said.

Prime Minister Naoto Kan is planning a second extra budget totaling about 2 trillion yen to follow a 4 trillion yen plan approved by parliament in May. Kan, whose public approval fell after the quake, said he would step down when the budget and two other bills pass in parliament.

Contracts to insure Japanese government debt against default for five years were at 90.8 basis points, according to June 30 prices from CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That compared with 84.3 basis points for China’s debt and 50.6 points for swaps protecting Treasuries.

The extra yield investors demand to own Japanese corporate bonds instead of similar-maturity government debt rose to 78 basis points last week from 27 basis points before the March 11 earthquake, according to Nomura Securities Co.’s Bond Performance Index.

--With assistance from Rocky Swift and Patrick Chu in Tokyo. Editors: Rocky Swift, Brian Fowler

To contact the reporters on this story: Keiko Ujikane in Tokyo at; Masaki Kondo in Singapore at

To contact the editor responsible for this story: Rocky Swift at

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