Bloomberg News

Volatility at Record Low Signals More BOJ Stimulus: Japan Credit

November 08, 2012

The drop in a measure of potential swings in Japanese government bonds to a record low is a signal of more monetary easing to come as the economy shrinks.

Implied volatility in JGB futures, a gauge of expected moves used to price options, dropped to 1.27 percent, the least since at least 2002 and compared with 3.71 percent for similar U.S. contracts, data compiled by Bloomberg show. Japan’s 10-year note yield slid to a three-month low of 0.73 percent today, extending its decline from yesterday when data showed machinery orders decreased more than estimated. Central bank interest rates near zero are limiting the scope for bond yields to decline, keeping volatility low.

The government and domestic companies have ramped up pressure on Bank of Japan Governor Masaaki Shirakawa to add to stimulus as the strong yen weighs on exports from the world’s third-biggest economy. Japan’s gross domestic product probably shrank the most since last year’s record earthquake in the third quarter, according to a survey of economists by Bloomberg News before a report due Nov. 12.

“The Japanese economic numbers we are seeing are so bad that they give me the chills,” said Teruyoshi Sotome, a Tokyo- based senior bond strategist at Mizuho Securities Co., one of the 25 primary dealers obliged to bid at government debt sales. “Bond yields are more likely to fall when the economy and monetary easing are considered.”

Implied volatility declined as investors sold more put options, or rights to sell an asset for a predetermined price, signaling little concern that debt values will drop, according to Sotome. Bond futures climbed to as high as 144.61 today, a level unseen since July 25.

GDP Contraction

Japan’s machinery orders decreased 4.3 percent in September from the prior month, a report from the Cabinet Office showed yesterday, compared with the 2.1 percent drop estimated by economists. Separate government data is likely to show next week that GDP shrank an annualized 3.4 percent in the three months through Sept. 30, economists forecast.

Elsewhere in Japan’s credit markets, Hokuriku Electric Power Co. (9505) set the coupon on 10 billion yen of four-year notes at 0.5 percent, according to a filing yesterday with the Ministry of Finance.

The city of Nagoya hired banks for a 20 billion yen offering of 10-year securities, according to a statement from Mizuho Financial Group Inc. (8411), which is managing the deal with Bank of America Corp. and Daiwa Securities Group Inc.

Japan’s corporate debt has handed investors a 0.13 percent loss since the end of September, compared with a 0.15 percent return for the nation’s sovereign notes, according to Bank of America Merrill Lynch index data. Corporate bonds worldwide have returned 1.48 percent during the period, the data show.

Treasuries, Bunds

Japanese investors bought a net 1.26 trillion yen of U.S government debt in September, the largest figure since the same month last year, Ministry of Finance data showed yesterday. Net purchases of German bunds totaled 881.5 billion yen, the highest since June 2010.

The extra yield that investors demand to hold U.S. two-year Treasuries rather than similar maturity Japanese bonds narrowed to 15.8 basis points yesterday, the least since Oct. 15, according to data compiled by Bloomberg. Shirakawa has said the spread has a relatively high correlation with the dollar-yen rate. One basis point is 0.01 percentage point.

The yen strengthened as much as 0.9 percent yesterday to 79.32 per dollar, and traded at 79.50 at 10:16 a.m. in Tokyo. That compared with the post-World War II record of 75.35 reached a year earlier.

Current Account

Japan posted a 142 billion-yen deficit in its current account on a seasonally adjusted basis, a Ministry of Finance report showed yesterday, the first shortfall since at least 1985. The country had an annual surplus in the broadest measure of trade since that year, enabling the world’s most-indebted nation to finance a government deficit domestically for lower borrowing costs.

“A current-account deficit should mean a higher bond yield and a weaker yen, but that’s not what we get,” said Masaru Hamasaki, the Tokyo-based chief strategist at Toyota Asset Management Co., which oversees the equivalent of $23 billion in assets. “A deficit will create weakness for the country, though it doesn’t mean Japan will lose its credibility all at once.”

A 399.6 billion-yen sale yesterday of 40-year debt, Japan’s longest-maturity bonds, attracted bids valued at 3.82 times the amount on offer, up from 3.48 at the previous auction in August, according to Finance Ministry data.

CDS Drop

The cost to insure JGBs against nonpayment for five years was at 68 basis points yesterday, down from this year’s high of 154 basis points on Jan. 11, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Investor confidence in Japan’s finances improved even after the country announced 750 billion yen of fiscal stimulus on Oct. 26, or equivalent to 0.2 percent of the country’s annual economic output. The Bank of Japan (8301) increased its asset-purchase program by 11 trillion yen to 66 trillion yen four days later, saying the central bank and the government will make “utmost” efforts to overcome deflation.

“Because there is little room for government spending, Japan has no choice but to rely on monetary easing to shore up the economy,” said Shogo Fujita, the chief Japanese bond strategist in Tokyo at Bank of America Merrill Lynch.

As the BOJ expands bond buying, 10-year yields may slide to as low as 0.55 percent by the end of March, Fujita forecast. That would be below the 0.72 percent level reached in July that was the least since all-time lows were set in 2003.

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Shigeki Nozawa in Tokyo at snozawa1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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