Bloomberg News

Yen Gets Boost as Yields to Treasuries Shrink: Japan Credit

July 14, 2011

July 15 (Bloomberg) -- The yen is getting a boost as the prospect of further monetary easing by the Federal Reserve pushes the difference in yields between Japanese government bonds and Treasuries to the least in almost 2 1/2 years.

The extra yield offered by two-year Treasuries over similar-maturity Japanese debt was 21.3 basis points yesterday, approaching the least since December 2008, after Fed Chairman Ben S. Bernanke told lawmakers the central bank has more tools to spur growth. Demand increased at a sale yesterday of Japanese five-year notes to the most in three months, and the yen rose to 78.47 per dollar, its strongest since March 17.

While the Bank of Japan raised its economic assessment this week, an appreciating yen is threatening to derail the nation’s export-led recovery from a record earthquake in March. Concern some European countries will fail to meet their debt obligations boosts demand for the yen as a haven and pressures the BOJ to take steps to support the economy.

“Because the dollar is seen to stay below 80 yen for a longer time, expectations are increasing for the BOJ’s additional easing, and thus bond buying,” said Makoto Noji, a senior bond and currency strategist in Tokyo at SMBC Nikko Securities Inc., one of the 25 primary dealers obliged to bid at government debt sales. The two-year spread between the U.S. and Japan “won’t widen,” he said.

Japan’s bonds climbed yesterday, with five-year yields declining 3.5 basis points, or 0.035 percentage point, to 0.37 percent, the lowest level since November. The rate was unchanged at 0.37 percent today. The auction of five-year debt drew bids for 3.52 times the amount offered, the most since April.

Lack of Jobs

Two-year Treasuries surged after a Labor Department report on July 8 showed U.S. employers added the fewest jobs in nine months in June as the U.S. economy struggles to recover.

The dollar-yen exchange rate had a correlation of 0.88 with the two-year yield spread between the U.S. and Japan for the past two years. A rate of 1 would mean the assets move in tandem.

Japanese investors sold 203 billion yen ($2.57 billion) more in overseas bonds than they bought in the week ended July 8, the first net sale since June 3, data from the Ministry of Finance showed yesterday.

The Fed completed a second round of so-called quantitative easing last month, in which the central bank bought $600 billion of Treasuries to lower borrowing costs and stimulate the economy.

Weakness ‘More Persistent’

“The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support,” Bernanke told Congress on July 13. One option for additional stimulus would be to pledge to hold rates at record lows and keep the Fed’s balance sheet assets at a record high of almost $3 trillion for a longer period of time, he said.

The central bank isn’t currently ready to embark on a third round of government bond-buying to stimulate the economy, Bernanke told Congress yesterday.

The yen climbed yesterday to the highest level since March 17, the day before the Group of Seven countries jointly intervened in currency markets to combat what the G-7 called “excess volatility and disorderly movements in exchange rates.” The yen’s advance will become “problematic” if it remains strong, Finance Minister Yoshihiko Noda told reporters yesterday.

Yen Seen Strengthening

SMBC Nikko forecasts the yen will strengthen to as high as 78 per dollar between July and September, raising its projection from 80, Keiji Matsumoto, a currency strategist at the brokerage, wrote in a report on July 13.

The Nikkei 225 Stock Average has held above 9,800 this month after declining to 8,227.63 on March 15, the lowest since April 2009. Japan’s economic activity is “picking up” as the after-effects of the March 11 earthquake ease, the BOJ said on July 12 after a policy meeting.

“As long as the Nikkei holds around 10,000, you can’t really say you need to stop currency volatility” to prevent the economic outlook from deteriorating, said Daisaku Ueno, Tokyo- based president of Research Institute Ltd., a unit of Japan’s largest online currency broker. “We are seeing persistent dollar-negative pressure made in the U.S. rather than yen-positive pressure made in Japan.”

The Nikkei 225 rose 0.2 percent to 9,955.57 as of the 11 a.m. trading break in Tokyo today, while the yen was at 79.12 per dollar from 79.14 yesterday in New York.

Asset-Purchase Fund

The BOJ currently buys assets, including government and corporate debt as well as stock funds, through a 10 trillion-yen fund. The central bank separately purchases 1.8 trillion yen of government bonds every month.

Europe is at the “epicenter” of a debt crisis that concerns the entire developed world, European Central Bank President Jean-Claude Trichet said July 10. Yields on 10-year Italian debt climbed to the highest since 1997 this week, stoking concern the region’s debt crisis is spreading to Europe’s largest borrower.

Five-year contracts to insure Japan’s bonds against default rose 0.9 basis points to 91.50 basis points yesterday. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments rose 64 basis points this month to 283 as of July 13. An increase signals deteriorating perceptions of credit quality.

“Worries about Italy won’t dissipate easily,” Nikko’s Noji said. “The prolonged appreciation of the yen is inevitable.”

--Editors: Nicholas Reynolds, Jonathan Annells

To contact the reporters on this story: Masaki Kondo in Singapore at; Yoshiaki Nohara in Tokyo at

To contact the editor responsible for this story: Nicholas Reynolds at

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