Bloomberg News

Kuroda’s Inflation Failure Seen in Long Bond Rally: Japan Credit

February 26, 2013

ADB President Haruhiko Kuroda

Haruhiko Kuroda, president of the Asian Development Bank (ADB). Japan's Prime Minister Shinzo Abe will probably nominate Kuroda as the new central bank chief and academic Kikuo Iwata as a deputy. Photographer: Kiyoshi Ota/Bloomberg

Japan’s government bond yield curve is pricing in the success of Haruhiko Kuroda in adopting more aggressive easing as the next Bank of Japan (8301) governor and his ultimate failure to hit a 2 percent inflation target.

The extra yield investors demand to hold 30-year JGBs instead of 5-year notes slid to 1.77 percentage points from the seven-year high of 1.86 set earlier this month, reflecting speculation of increased BOJ purchases of debt and that the buying will do little to spur consumer prices. A similar spread in the U.S. was at 2.3 percentage points.

Japan’s five-year yields fell to a record 0.115 percent today as officials said Prime Minister Shinzo Abe will probably nominate Asian Development Bank President Kuroda as the new central bank chief and academic Kikuo Iwata as a deputy. The bond market is signaling expectations that inflation will average 1.26 percent in the next five years, meaning that while Japan may exit more than a decade of deflation, the BOJ won’t meet Abe’s inflation goal.

“Kuroda and Iwata would likely carry out various easing measures more aggressively than other candidates, just as Abe is hoping,” said Shuntaro Take, the deputy general manager for the corporate accounting and investment department at Tokio Marine & Nichido Life Insurance Co., which manages about $41 billion in Tokyo. Even so, “expectations are very low that inflation will be brought about.”

Parliament Approval

Japan’s benchmark 10-year yield fell three basis points to 0.675 percent today, the lowest since June 2003. The yield may drop to 0.6 percent by the end of June, Take said, which would be the least since June 2003.

BOJ Governor Masaaki Shirakawa and his two deputies are due to step down on March 19. Nominees for their successors must be approved by the upper house of parliament, where Abe’s Liberal Democratic Party lacks a majority. The opposition Democratic Party of Japan is ready to approve Abe’s nominations, the Nikkei newspaper reported today.

The prime minister will also probably nominate Hiroshi Nakaso, a senior BOJ official, as the second deputy chief, according to one government official and a ruling coalition executive, who asked not to be named as the talks are private.

Finance Minister Taro Aso told reporters in Seoul yesterday that Kuroda would be a right choice for the next BOJ governor.

Kuroda said in a Feb. 11 interview that it was important to end consumer-price declines because they cause households and businesses to postpone spending. He said Japan’s central bank has “substantial room” for further easing.

‘QE Zealot’

In 2002, he advocated an inflation target of as high as 3 percent, and this month said that the current goal is “appropriate.” Kuroda, who is also a former vice finance minister, said the BOJ could purchase the equivalent of trillions of dollars of assets to expand its balance sheet.

The 2 percent inflation goal is higher than the yield on all JGBs maturing in up to 30 years. The 30-year rate slid three basis points, or 0.03 percentage point, to 1.87 percent today. Deflation is a positive for bonds as it enhances the purchasing power of their fixed payments.

Iwata, an economics professor at Gakushuin University in Tokyo, said in an interview last month that the best way to achieve 2 percent inflation is to increase the cash that commercial lenders hold at the central bank, boosting the so- called monetary base.

“Abe’s made absolutely clear that the new Bank of Japan governor will do precisely as he’s told or he will fire him,” Nicholas Smith, the Japan strategist at CLSA Asia-Pacific Markets, said in an interview with Bloomberg Television. That direction is backed up by the choice of Iwata “who is an absolute QE zealot.”

Japan’s Friedman

The Gakushuin professor is Japan’s equivalent of Milton Friedman and has repeatedly criticized central bank policy, Hideo Kumano, the chief economist at Dai-Ichi Life Research Institute in Tokyo and a former central bank official, said yesterday. Friedman, the Nobel prize-winning American economist, espoused the theory that changes in money supply prompt price fluctuations.

Elsewhere in Japan’s credit markets, Hankyu Hanshin Holdings Inc. (9042), an Osaka, Japan-based passenger rail company, hired banks to sell 10 billion yen ($109 million) of seven-year bonds, according to Mitsubishi UFJ Morgan Stanley Securities Co., which will manage the deal with Daiwa Securities Group Inc. and SMBC Nikko Securities Inc.

Japan’s corporate bonds have handed investors 0.28 percent this month, compared with the 0.41 percent return for the nation’s sovereign notes, according to Bank of America Merrill Lynch data. Company debt worldwide has gained 0.77 percent.

Inflation Bonds

The Ministry of Finance will offer up to 2.7 trillion yen of two-year notes on Feb. 28. The previous auction on Jan. 31 drew bids 10.13 times the amount on offer, in line with the average of previous 10 sales.

The yen has depreciated about 12 percent versus the dollar since Abe called for unlimited money printing by the BOJ on Nov. 15, and it tumbled to 94.77 yesterday, the lowest since May 2010. A weaker currency typically boosts import prices while making Japanese-made products cheaper overseas.

The price of the nation’s inflation-linked securities maturing in June 2018 climbed to a record 113.087 yen yesterday from a low of 76.342 yen in December 2008, signaling rising demand for protection against future gains in consumer prices.

45-Year Career

Heading the BOJ would cap a 45-year career for Kuroda that includes a secondment to Washington with the International Monetary Fund, a stint as adviser to former Prime Minister Junichiro Koizumi and a master’s degree from Oxford University.

Kuroda rose to become Japan’s vice finance minister for international affairs, the senior official in charge of foreign- exchange issues, from 1999 to 2003. He succeeded Eisuke Sakakibara, who was known as “Mr. Yen” for his ability to influence the currency markets with his comments.

“The Kuroda-Iwata pair wouldn’t do things half-heartedly but would take very aggressive actions” to boost inflation prospects, said Tadashi Matsukawa, who helps oversee the equivalent of $1.5 billion as the head of fixed-income investment at PineBridge Investments Japan Co. in Tokyo. “We can’t rule out the possibility that 2 percent inflation will be eventually achieved.”

CPI Data

The BOJ must be committed to eradicating deflation “through whatever measures available,” Kuroda said in an interview on Feb. 11. He also said the “global standard” for central bank’s to achieve price goals is about two years.

Consumer prices excluding fresh food probably fell 0.2 percent in January from a year earlier, according to the median estimate of economists surveyed by Bloomberg News before the data due for release on March 1. The so-called core inflation rate has decreased an average of 0.2 percent every month over the past decade and has never been above 2 percent for more than a year since 1992.

“There are very few people who seriously think 2 percent inflation is achievable,” said Shogo Fujita, chief Japanese bond strategist in Tokyo at Bank of America Merrill Lynch, one of the 24 primary dealers obliged to bid at Japanese government bond sales. “The market is asking how determined the BOJ is to pursue lowering bond yields.”

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@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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