Bloomberg News

Yen Boosted as Smaller Volatility Lures Investors: Japan Credit

November 01, 2011

Oct. 26 (Bloomberg) -- Japanese investors are increasing holdings of foreign securities at the slowest pace in four years while overseas money managers are scooping up yen-denominated assets, contributing to gains in the currency.

Domestic fund managers bought a net 6.45 trillion yen ($85 billion) in overseas bonds, money-market instruments and stocks in 2011 through September, Ministry of Finance data show, down 72 percent from the year earlier period. Overseas investors purchased 20.9 trillion yen of Japanese securities in the period, more than double the 2010 pace.

The yen’s climb to a postwar record against the greenback reached yesterday has driven dollar-based gains on Japanese government bonds to 8.8 percent this year, surpassing the 7.2 percent in U.S. currency terms for global sovereign debt, Bank of America Merrill Lynch data show. Demand for yen assets as a haven has surged amid the prolonged debt crisis in Europe and signs that the Federal Reserve will add to monetary easing that debases the U.S. currency.

“What’s behind demand for Japan’s bonds is not their return or attractiveness as financial products but the sense that Japan is the least volatile market,” said Akio Kato, team leader for Japanese debt in Tokyo at Kokusai Asset Management Co., which manages the equivalent of $52 billion. Europe’s debt problem and the U.S. malaise are “narrowing investment options for fund managers,” he said.

Kokusai’s Global Sovereign Open, Japan’s biggest mutual fund with $27 billion under management, said in September it boosted yen-denominated assets and cut holdings of Italian debt.

Low Volatility

Japan’s 10-year bonds climbed today, driving the yield down 2.5 basis points to 0.990 percent, the lowest among developed bond markets tracked by Bloomberg. The volatility of 10-year debt in Japan based on a 60-day reading was 25, compared with 67 for U.S. Treasuries and 64 for German bunds, according to Bloomberg data.

The yen touched a record 75.74 yesterday before trading at 75.91 as of 8:57 a.m. in London. The currency has appreciated 12 percent over the past six months, the best performance among the 10 developed-nation peers tracked by Bloomberg Correlation- Weighted Indexes.

Japan’s currency and government bonds typically gain in times of financial turmoil as the country’s trade surplus means it doesn’t rely on foreign capital. The stronger yen in turn makes Japanese-made products less competitive overseas, with Nissan Motor Co. Chief Executive Officer Carlos Ghosn saying this week his company will have to “hollow out” domestic production should the currency remain strong.

‘Decisive’ Measures

Finance Minister Jun Azumi said today his ministry will take “decisive” measures to stem the yen’s rise and won’t rule out any steps to deal with the situation. Japan has already intervened in markets three times since September 2010, with every attempt failing to stem gains in its currency. The government said on Oct. 21 that it will bolster funds that can be used to intervene.

Any future attempts to debase the yen will fail unless they’re coordinated with other nations, former Finance Ministry official Eisuke Sakakibara said last week at a Bloomberg conference in Tokyo. The currency may strengthen to the low 70s versus the greenback and gain past 100 per euro, said Sakakibara who became known as “Mr. Yen” during his 1997-1999 tenure at the ministry.

The Cabinet Office, headed by Prime Minister Yoshihiko Noda, downgraded its assessment of Japan’s economy this month for the first time since April. “There are downside risks of overseas economies and the impact of the yen’s appreciation” to Japan’s exports, the Cabinet said in its monthly report.

Gross domestic product dropped at an annualized 2.1 percent pace in the three months ended June 30, a third quarter of economic contraction, a government report showed last month.

Economy Downgrade

The Bank of Japan has refrained from easing policy since August when it increased by 50 percent a fund that buys stocks, government bonds and corporate debt. The central bank also carries out intervention operations on behalf of the government.

“With Europe and the U.S. tilting toward further monetary easing, people can buy yen comfortably if expectations prevail that the BOJ will do nothing,” said Satoru Ogasawara, vice president of economics research in Tokyo at Credit Suisse Group AG.

Central bank policy makers will discuss more monetary easing at a meeting tomorrow, the Nikkei newspaper reported. The BOJ may consider expanding its asset-purchase program and purchases bonds with maturities longer than two years, according to the report, which didn’t cite anyone.

Two-Year Auction

A sale of 2.39 trillion yen in two-year notes today saw the strongest demand since the July auction. Investors bid for 4.1 times the amount on offer, compared with a so-called bid-to- cover ration of 3.3 in the September sale.

Speculation about BOJ easing and firm results at the two- year offering “fueled buying from investors who still have large excess funds available for JGBs investment,” RuiXue Xu, a rates strategist at Royal Bank of Scotland Plc in Tokyo, wrote in a note today. “The probability for the BOJ to take action tomorrow is high, repeating the moves in August.

The European Central Bank said on Oct. 6 it will resume purchases of bonds that are backed by mortgages or public-sector loans and will reintroduce yearlong loans for banks. Federal Reserve Bank of New York President William C. Dudley said on Oct. 24 ‘‘it’s possible that we could do another round of quantitative easing.’’

Japan CDS

Elsewhere in Japan’s credit markets, the extra yield investors demand to hold Japanese corporate debt instead of government bonds was 45 basis points yesterday, compared with 241 basis points globally, according to indexes compiled by Bank of America Merrill Lynch.

Five-year credit-default swaps on Japanese government bonds were at 117.9 basis points, down 36.9 basis points from a record reached earlier this month, CMA prices in New York show. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.

Stagnating growth in Japanese consumer prices boosts the value of fixed payments from debt, making the nation’s bonds relatively attractive, according to Mizuho Securities Co., one of the 25 primary dealers obliged to bid at government debt sales.

At its meeting this week, the BOJ may address the nation’s entrenched deflation and refrain from signaling any increases in interest rates, said Jun Kawakami, a market economist at Mizuho. The central bank is due to release its report on the outlook for economic activity and prices on Oct. 27.

Stagnant Prices

Japan’s 10-year bonds yield 0.83 percentage point more than the growth rate of consumer prices. Yields on similar-maturity U.S. and German debt are below inflation rates in the countries.

Consumer prices across Japan probably rose 0.1 percent in September from a year earlier, while those for Tokyo fell 0.5 percent this month from a year earlier, economists surveyed by Bloomberg News said ahead of the Oct. 28 data.

"We can hardly imagine a scenario that inflation will accelerate in Japan,” said Kawakami. “From the view point of relative yields, yen assets will likely continue to be in demand.”

--Editors: Garfield Reynolds, Jonathan Annells.

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

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

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