Bloomberg News

Yen Sends Cash to Priciest Topix to JGBs Since ’11: Japan Credit

April 22, 2013

Yen Sends Cash to Priciest Topix to JGBs Since ’11

Dealers work under a monitor displaying the exchange rate of the yen against the U.S. dollar at a foreign exchange brokerage in Tokyo on April 22, 2013. The yen touched 99.9 per dollar in Tokyo yesterday, near the lowest since April 2009. Photographer: Yuriko Nakao/Bloomberg

The yen’s weakening toward 100 per dollar has forced investors to redo their math on Japan’s corporate earnings, prompting them to recommend buying shares that are the priciest relative to bonds in two years.

Tokio Marine Asset Management Co. says Japanese stocks have room for further gains, while Okasan Asset Management Co. expects a shift to riskier assets. The estimated dividend yield of companies in the Topix Index was 0.97 percentage points more than 10-year government debt rates on April 15, the least since July 11, 2011. That’s still more than the 0.5 percentage point similar U.S. spread, data compiled by Bloomberg show.

The Topix index climbed to the highest level since September 2008 and bonds slumped on optimism Bank of Japan Governor Haruhiko Kuroda’s stimulus will revive consumer spending and end 15 years of deflation. The yen touched 99.9 per dollar in Tokyo yesterday, near the lowest since April 2009, after the show of support for the BOJ’s stimulus plan at a Group of 20 meeting in Washington.

“Japan’s return from deflation to economic normality will spur corporations to shift more money to dividends and capital investment,” said Kenichi Kubo, a senior fund manager at Tokio Marine Asset Management, which oversees about 5 trillion yen ($50 billion). “The green light from the G-20 for Japan’s monetary policy is boosting expectations for a weaker yen.”

Topix Advances

The Topix surged 59 percent as of yesterday from Nov. 14, when the election that propelled Prime Minister Shinzo Abe to power was announced. Brokerages and real estate companies led the advance amid speculation his planned stimulus measures, dubbed Abenomics, will raise the value of assets.

The dividend yield on the equity index has fallen 99.5 basis points, or 0.995 percentage point, to 1.605 percent during the same period. The index traded at 17.3 times estimated earnings yesterday, compared with 14.1 for the Standard & Poor’s 500 Index on April 19.

Kuroda set a two-year horizon for achieving the BOJ’s 2 percent annual inflation target and announced a plan to double monthly debt buying. The April 4 decision caused the benchmark yield to slump to an all-time low then surge twofold the next day. The 10-year yield fell 1/2 a basis point to 0.605 percent as of 10 a.m. in Tokyo today. It declined to a record low of 0.315 percent on April 5.

Sovereign Yields

The yield on 30-year government securities jumped 7 1/2 basis points to 1.6 percent in Tokyo yesterday, while the 20- year rate increased 5 basis points to 1.48 percent.

“Japanese bond investors tend to follow similar investment patterns, which can result in sudden market moves,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Co., a unit of Norinchukin Bank, which has 74.07 trillion yen in assets. “The benchmark rates are more likely to rise going forward, but the BOJ’s asset-buying program will probably prevent sudden gains, flattening the yield curve.”

Elsewhere in Japan’s credit markets, Mori Hills REIT Investment Corp. hired Barclays Plc and Mitsubishi UFJ Morgan Stanley Securities Co. for a sale of five- and seven-year bonds, according to a statement from Mitsubishi UFJ Morgan Stanley Securities. The real estate investment trust last sold debt in November 2012, offering 7 billion yen of three- and five-year notes, according to data compiled by Bloomberg.

Bond Returns

Japan’s corporate bonds have handed investors a 0.76 percent gain this year, compared with a 1.82 percent return for the nation’s sovereign notes, according to Bank of America Merrill Lynch index data. Company debt worldwide has climbed 1.67 percent.

Japan’s benchmark 10-year securities yielded 108 basis points less than similar-maturity U.S. Treasuries, compared with 102.5 a year earlier, data compiled by Bloomberg show.

Nippon Life Insurance Co. may buy more foreign debt and cut holdings of long-term domestic securities if yields in Japan stay low, Hiroshi Ozeki, general manager at the investment department of the country’s largest life insurer, said in a briefing yesterday. The company may boost purchases of domestic and foreign corporate debt in the fiscal year started April 1, he said.

The Ministry of Finance will sell about 2.9 trillion yen of two-year notes on April 25. The April 16 offering of five-year notes drew bids valued at 3.09 times the amount available, the lowest demand since December 2011, according to ministry data.

Default Swaps

The yen traded at 99.24 per dollar at 10:06 a.m. in Tokyo, after falling to a four-year low of 99.95 on April 11. The currency has plunged almost 20 percent over the past six months, the worst performance among the 10 developed-market currencies tracked by the Bloomberg Correlation Weighted Indexes.

The cost to insure Japan’s sovereign notes for five years against nonpayment was at 67 basis points yesterday, matching the lowest in a month, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. A drop in the credit-default swaps signals improving perceptions of creditworthiness.

“The BOJ’s buying of sovereign assets is encouraging investors to move on to riskier securities,” said Satoshi Yamada, a Tokyo-based manager of debt trading at Okasan Asset Management, which oversees about 1.4 trillion yen in assets. “There are still serious concerns about whether the policies will translate to actual economic improvement.”

Economic Outlook

Japan’s economy probably grew at an annualized 2.15 percent pace in the first quarter, the fastest pace in a year, according to the median estimate of 30 economists surveyed by Bloomberg News. The economy’s expansion will probably accelerate to 2.85 percent in the current quarter and 3.15 percent in the three months to Sept. 30, the data show.

The International Monetary Fund last week doubled its forecast for fiscal 2014 growth in Japan to 1.4 percent from its January projection. The Washington-based fund said in its World Economic Outlook report that the BOJ’s stimulus will help boost inflation.

Japan’s five-year breakeven rate, a measure of inflation expectations, was at 1.5 percentage points yesterday, near the record high of 1.54 percent reached in March. Consumer prices excluding fresh food fell 0.3 percent from a year earlier in February, government data showed last month.

The BOJ is considering raising its inflation forecast in its next outlook report due for release on April 26, said people familiar with the bank’s discussions. It may upgrade its view on so-called core consumer prices to at least 1.5 percent from 0.9 percent for fiscal 2014, according to the people, who asked not to be identified because the talks were private.

Yen Windfall

Seven & I Holdings Co., the operator of 7-Eleven convenience stores, said earlier this month that the weaker yen will help bolster annual profit to a record this fiscal year. Fast Retailing Co., the seller of Uniqlo branded apparel, raised its net income outlook citing the currency’s move.

Toyota Motor Corp. cited the weaker yen when it raised in February its profit forecast 10 percent to 860 billion yen for the 12 months ended March 31. Mazda Motor Corp. and Fuji Heavy Industries Ltd. also increased their earnings estimates as the weakening currency makes Japanese products more profitable overseas.

Of the 1,698 companies listed on the Topix, more than 200 are scheduled to report earnings from today through April 26, according to data compiled by Bloomberg.

“The earnings results must confirm the market’s expectations” for the equities rally to continue, Norichukin’s Minami said. “The imbalance between low benchmark rates and rallying shares may be with us for some time, because of all the money seeking an outlet amid the excessive liquidity.”

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Toshiro Hasegawa in Tokyo at thasegawa6@bloomberg.net

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net


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