Bloomberg News

Tankan May Signal Best Bond Rally Since ‘03 Intact: Japan Credit

September 30, 2011

Sept. 30 (Bloomberg) -- Executives of Japan’s biggest companies are likely to signal little improvement in the economy through year-end, paving the way for the nation’s bonds to extend their longest monthly winning streak in eight years.

Optimists will barely exceed pessimists among leaders of the largest manufacturers this quarter and next, according to a Bloomberg News survey of economists before the Bank of Japan’s Tankan report on Oct. 3. A record earthquake in March and signs of slowing growth overseas have fueled demand for the safest securities, with Japan’s government bonds rising for seven months through September, the longest stretch since May 2003, Bank of America Merrill Lynch data show. The securities returned 2.5 percent in the period, compared with 8.7 percent for U.S. debt.

The government is compiling its third supplemental budget to cope with an economic contraction triggered by the quake. The Organization for Economic Cooperation and Development cut to zero its fourth-quarter growth forecast for Japan, saying rebuilding effects will fade.

“With slowing growth overseas, the bond market is pricing in downside risks to Japan’s economy,” said Satoshi Yamada, chief quantitative analyst in Tokyo at SMBC Nikko Securities Inc., one of the 25 primary dealers obliged to bid at government debt sales. “The Tankan outlook for sentiment is expected to be stagnant.”

The large manufacturers’ index will be 2 for the third quarter and 3 for the fourth, while the reading for big non- manufacturers is expected to stay at 2 during both periods, according to the Bloomberg survey. The index, released quarterly by the BOJ, subtracts the percentage of companies saying business is bad from those saying it is good.

In the prior Tankan survey, the index of sentiment at large manufacturers fell to minus 9 in June from 6 in March.

Capital Expenditure

Large companies will also predict a 4.3 percent increase in capital spending for the fiscal year ending March 2012, little changed from their estimate of a 4.2 percent gain three months earlier, the survey showed.

“Capital expenditure plans, if strong, lead to a decline in the surplus of funds available for JGB investment and thus push yields higher,” said Christian Carrillo, head of Asia- Pacific interest-rate strategy in Tokyo at Societe Generale SA. The yield on Japanese 10-year bonds will remain near 1 percent for the rest of the year, he added.

Japan’s debt handed investors a 0.5 percent return in September, Merrill Lynch data show. The 10-year yield reached a 10-month low of 0.965 percent on Sept. 22 and was at 1.005 percent as of 1:10 p.m. in Tokyo, the second lowest after Switzerland’s among developed bond markets tracked by Bloomberg.

Spending Package

The ruling Democratic Party of Japan this week agreed on a spending package of about 12 trillion yen ($157 billion) in addition to the 6 trillion yen in plans already announced. The DPJ also proposed a temporary tax increase to finance rebuilding from the March 11 temblor.

Yoshihiko Noda, who succeeded Naoto Kan this month as Japan’s sixth prime minister in the past five years, must negotiate with opposition lawmakers to get the plan approved.

“Because Japan’s finances are damaged, getting money tends to prevail over spending,” said Tadashi Matsukawa, who helps manage about $2 billion in bonds at Tokyo-based PineBridge Investments Japan Co. “In most cases, what’s called a large economic measure often ends up being insignificant.’

Demand for the relative safety of government debt has been bolstered by concern the U.S. recovery is slowing and a debt crisis will spread from Greece to Europe’s larger economies. U.S. Treasury Secretary Timothy F. Geithner said this week that Europe’s debt woes are ‘‘starting to hurt growth everywhere.”

Retail Sales

Japan’s economic data this month have also undershot expectations. Retail sales dropped 1.7 percent in August from July, government data showed yesterday, while economists surveyed by Bloomberg had forecast an increase. Trade figures last week showed that exports rose 2.8 percent year-on-year in August, less than all economist forecasts.

Sony Corp., Japan’s largest exporter of consumer electronics, expects a “huge impact” on earnings from the weaker euro, Hiroshi Kurihara, corporate treasurer at the Tokyo- based company, said in an interview on Sept. 28. Europe’s debt woes have spurred declines in the region’s shared currency, which slid to a decade low against the yen this month.

The yen tends to appreciate during economic and financial turmoil because Japan’s current account surplus makes it less reliant on foreign capital. A stronger yen increases prices for Japanese products abroad and reduces the value of overseas earnings at domestic companies.

‘Double Whammy’

“Combined with the natural disasters, the yen’s broad strength has resulted in a double-whammy to the Japanese economy,” said Satoshi Yamada, who helps oversee about $12 billion as manager of fixed-income trading at Okasan Asset Management Co. in Tokyo. “Global risk aversion is driving funds into the yen and Japan’s debt, putting downward pressure on bond yields.”

Elsewhere in Japan’s credit market, the Markit iTraxx Japan Index of credit-default swaps for 50 companies, including Sony, jumped to 206.75 basis points yesterday, a level unseen since July 2009. The gauge is a benchmark for protecting bonds against default.

Japanese corporate debt has handed investors a 1.3 percent loss this year, compared with a 1.8 percent gain in the nation’s government bonds, Bank of America Merrill Lynch indexes show. The nation’s stocks have underperformed global peers, with the Nikkei 225 Stock Average losing 15 percent this year, compared with a 7.7 percent drop for the Standard & Poor’s 500 Index in the U.S.

The nation’s economy will grow 2.5 percent or more in the year starting April 2012, Noda said in parliament on Sept. 15. While the country remains in a “severe state” from the March disaster, it is recovering, he said.

“There’s a pervasive sense of uncertainty, stemming mostly from abroad, and there isn’t much that Japan can do to remain immune to the crisis of confidence overseas,” said Naomi Fink, a Japan strategist at Jefferies Japan Ltd. “This will affect the Tankan.”

--With assistance from Ken McCallum and Theresa Barraclough in Tokyo. Editors: Rocky Swift, Jonathan Annells.

To contact the reporters on this story: Masaki Kondo in Singapore at; Monami Yui in Tokyo at

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

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