Bloomberg News

Japan Benchmark Yield Posts Biggest Weekly Gain Since January

November 27, 2011

Nov. 25 (Bloomberg) -- Japan’s benchmark bond yields rose above 1 percent and completed the biggest weekly gain since January on concern the government will fail to rein in the world’s largest debt burden.

Twenty-year bonds fell the most since May today after Standard & Poor’s said yesterday it may be closer to lowering Japan’s sovereign grade because Prime Minister Yoshihiko Noda’s administration is failing to improve the nation’s finances. The International Monetary Fund said this week there’s a risk a “sudden spike” in yields may make the nation’s borrowings unsustainable. Japan’s bonds dropped as German notes fell this week after demand was the weakest since 1995 at a bund auction.

“The comments on a possible downgrade by S&P and the IMF report were unexpected,” said Tadashi Matsukawa, who helps manage about $2 billion in bonds at Tokyo-based PineBridge Investments Japan Co. “Investors seem to keep unwinding longs from yesterday afternoon.” A long is a bet an asset will rise.

Ten-year yields added 3.5 basis points to 1.03 percent at the 6:05 p.m. close at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The 1 percent bond due in September 2021 lost 0.312 yen to 99.732 yen. The last time the rate rose above 1 percent was Nov. 1. Yields have climbed 8.5 basis points this week, the most since the period ended Jan. 7.

Twenty-year yields jumped six basis points to 1.79 percent, the highest since Nov. 1. Thirty-year yields added five basis points to 1.96 percent. A basis point is 0.01 percentage point.

Ten-year bond futures for December delivery declined 0.51 to 142.29 at the afternoon close of the Tokyo Stock Exchange.

Global Yields

Ten-year yields climbed this week in 16 of 24 developed markets tracked by Bloomberg, even as investors seeking the safest assets drove down rates on U.S. Treasuries by the most since the five days ended Nov. 4.

Germany 10-year bonds slumped on Nov. 23 after the nation failed to get bids for 35 percent of the securities that it offered for sale.

“An increase in German bund yields, which were considered as a refuge from the European crisis, and a possible downgrade by the S&P made investors, especially those overseas, worried about Japanese assets,” said Tetsuya Inoue, a former BOJ official who is now chief researcher for financial markets for Nomura Research Institute Ltd. in Tokyo. “Japanese policy makers have been focusing on reconstruction, but now they need to start seeking drastic ways to decrease the debt burden. Any failure on this may push yields higher.”

‘Getting Worse’

Japan’s finances are “getting worse and worse,” Takahira Ogawa, Singapore-based director of sovereign ratings at S&P, said in an interview yesterday. S&P rates Japan at AA- and has had a negative outlook on the rating since April.

Ogawa said it “may be right in saying that we’re closer to a downgrade. But the deterioration has been gradual so far, and it’s not like we’re going to move today.”

Japanese Chief Cabinet Secretary Osamu Fujimura said the S&P comments didn’t reflect an official conclusion by the ratings company. He told reporters today in Tokyo the government intends to explain its plan on debt management.

IMF Report

Losses in Japanese bonds were limited after a report showed consumer prices fell for the first time since June, casting doubt on central bank forecasts for the world’s third-biggest economy to emerge from more than a decade of deflation.

Consumer prices excluding fresh food slid 0.1 percent in October from a year earlier, the statistics bureau said in Tokyo today. Barclays Capital says declines may persist for two years even as the BOJ forecasts gains of 0.1 percent for the year starting April and 0.5 percent in the following 12 months.

Concerns that Japan’s debt burden will worsen have hurt debt maturing in the 10 years or longer. The spread, or difference in yield, between two- and 10-year bonds expanded to 89 basis points, the widest since Oct. 31.

“Investors who have been thinking bonds have gotten overvalued are selling long-term debt,” said Hitoshi Asaoka, a senior strategist in Tokyo at Mizuho Trust & Banking Co. “The yield curve is steepening.”

The IMF said on Nov. 23 that concerns about Japan’s fiscal sustainability may result in a “sudden spike” in bond yields. Japan’s public borrowings are twice the size of the economy and the government projects it will exceed 1 quadrillion yen ($13 trillion) in the year through March as the nation pays for reconstruction from a record earthquake.

The European Commission forecast this month that Greece’s debt would rise to 162.8 percent of its economy this year and 198.3 percent next year.

Moody’s Investors Service cut Japan’s debt rating by one step to Aa3 on Aug. 24. S&P lowered its rating to AA- in January. Fitch Ratings also has Japan at AA- with a negative outlook.

--Editors: Naoto Hosoda, Garfield Reynolds

To contact the reporter on this story: Monami Yui in Tokyo at; Yumi Ikeda in Tokyo at

To contact the editor responsible for this story: Garfield Reynolds in Sydney at

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