Bloomberg News

Kuroda Says No Bubble as 10-Year Yield Nears 0.5%: Japan Credit

March 28, 2013

BOJ Governor Haruhiko Kuroda

Haruhiko Kuroda, governor of the Bank of Japan, said the BOJ may scrap a rule limiting the scale of asset buying and scoop up longer-maturity bonds to reach the price target, which the BOJ adopted in January at the urging of Prime Minister Shinzo Abe. Photographer: Haruyoshi Yamaguchi/Bloomberg

As benchmark yields plunged the most in two years toward a record low, Bank of Japan (8301) Governor Haruhiko Kuroda said not to worry about a bond-market bubble.

“We probably can’t say it’s a bubble,” Kuroda told lawmakers yesterday as the 10-year yield touched 0.51 percent, the least since June 2003 when the all-time low of 0.43 percent was set. The yield has dropped 28 1/2 basis points in 2013, set for the biggest quarterly slide since June 2010, even as the similar-maturity U.S. rate rose 8 basis points to 1.84 percent.

Kuroda said it’s necessary to lower longer-term yields further to combat deflation, signaling the BOJ will extend its debt purchases beyond three-year notes. Japanese government bonds have outperformed all major peers outside of Europe this year despite a public debt burden that’s estimated to rise to 245 percent of economic output this year, the world’s largest.

“There’s a good chance that the 10-year yield will fall to about 0.3 percent this year,” said Shogo Fujita, the chief Japanese bond strategist in Tokyo at Bank of America Merrill Lynch, one of the 24 primary dealers obliged to bid at Japan’s debt auctions. “The financial authority can control the yield curve.”

Kuroda, who leads his first policy meeting on April 3-4, told lawmakers that he aims to achieve a 2 percent annual inflation goal in two years. He said the BOJ may scrap a rule limiting the scale of asset buying and scoop up longer-maturity bonds to reach the price target, which the central bank adopted in January at the urging of Prime Minister Shinzo Abe.

Consumer Prices

Yields on longer-maturity debt also slid this quarter, with those on 20-year bonds dropping 38 basis points, the most since the three months ended December 2008, Bloomberg data show. A government report today showed consumer prices excluding fresh food fell 0.3 percent last month from a year earlier. The median estimate of economists surveyed by Bloomberg was for a 0.4 percent decline.

Pacific Investment Management Co., operator of the world’s biggest bond fund, expects the BOJ’s policy to be more aggressive and experimental.

“The BOJ will need to pursue ‘audacious’ monetary policy” to achieve the 2 percent inflation target, Richard Clarida, global strategic adviser, and Tomoya Masanao, the head of portfolio management for Japan, wrote in a commentary on Pimco’s website. “For global investors, this may mean a modest economic growth contribution from Japan, at least over a cyclical horizon, as well as additional central bank liquidity from the world’s third largest economy pouring into global markets.”

JGB Return

JGBs with a maturity of more than a year have returned 2.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. That’s the biggest non-currency adjusted gain after Ireland, Spain and Hungary among the 26 sovereign markets tracked.

About a month after the 10-year yield reached 0.43 percent on June 11, 2003, it shot up to 1.4 percent and ended the year at 1.36 percent. It’s the only year from 1995 to 2012 that Japan’s bonds had an annual loss, the EFFAS index shows.

“There is a risk for yields to rise,” said Akito Fukunaga, the chief rates strategist in Tokyo at RBS Securities Japan Ltd., a unit of Royal Bank of Scotland Group Plc. “Investors will be disappointed, and bonds will be sold heavily” unless the BOJ increases purchases of long-term debt by a large amount, he said.

Municipal Debt

Elsewhere in Japan’s credit markets, the city of Kawasaki and Kyoto prefecture hired banks for debt sales.

Kawasaki picked Daiwa Securities Group Inc., Goldman Sachs Group Inc. and Mizuho Financial Group Inc. for an offering of 10 billion yen ($106 million) of 20-year bonds next month, while Kyoto hired Daiwa and Mitsubishi UFJ Morgan Stanley Securities Co. for a 20 billion yen issuance of 10- and 15-year debt, according to separate statements yesterday from Daiwa and Mitsubishi UFJ Morgan Stanley.

Japan’s municipal notes have handed investors 0.9 percent this month, compared with a 1.26 percent return on the nation’s sovereign bonds, according to Bank of America Merrill Lynch index data. U.S. municipal debt has lost 0.61 percent.

The cost to insure Japan’s sovereign notes rose to 74 basis points yesterday, the highest since Feb. 4, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. An increase in credit-default swaps signals improving perceptions of creditworthiness.

Expanding Debt

Japan’s public debt is estimated to expand to 245 percent of gross domestic product this year compared with 170 percent in 2003, according to International Monetary Fund figures released in October.

The yen traded at 94.16 per dollar as of 10:01 a.m. in Tokyo from 94.15 yesterday. The Japanese currency has weakened 7.2 percent in the past three months, the biggest decliner among the 10 developed-market currencies tracked by the Bloomberg Correlation Weighted Indexes, amid expectations the BOJ will bolster monetary stimulus.

The central bank buys JGBs through two channels: its asset- buying program set up in October 2010 and outright purchase operations, also known as rinban. The APP buys sovereign debt maturing in one to three years, while 90 percent of the rinban operation targets notes with a maturity of 10 years or less.

Kuroda said this week that it’s worth considering merging the two operations.

“We have to conclude that the BOJ is likely to combine the rinban and APP, given remarks from officials,” said Takahiro Sekido, who formerly worked at the BOJ and is now a Japan strategist in Tokyo at the Bank of Tokyo-Mitsubishi UFJ Ltd. “But it’s dubious that just buying more JGBs will boost Japan’s growth potential or raise the inflation rate to 2 percent.”

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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