Bloomberg News

JGBs Declared Dead by Mizuho as Kuroda Hides Risks: Japan Credit

November 05, 2013

Bank of Japan

The Bank of Japan headquarters stands in Tokyo. “The JGB market is dead with only the BOJ driving bond prices,” said Tetsuya Miura, the chief bond strategist at Tokyo-based Mizuho Securities Co., one of the 23 primary dealers obliged to bid at government auctions. Photographer: Tomohiro Ohsumi/Bloomberg

Mizuho Securities Co. said Bank of Japan dominance has killed the nation’s sovereign bond market, leaving it unable to reflect either the success of stimulus policies or fiscal risks.

Monthly trading of Japanese government bonds among the biggest holders including banks and insurers shrank to 37.9 trillion yen ($385 billion) last quarter, the least on record going back to 2004, according to Japan Securities Dealers Association data. Totan Research Co. and Spiro Sovereign Strategy also said BOJ monetary stimulus is cutting the tie between economic fundamentals and bonds, which yield 0.6 percent for 10 years, the least in the world.

“The JGB market is dead with only the BOJ driving bond prices,” said Tetsuya Miura, the chief bond strategist at Tokyo-based Mizuho, one of the 23 primary dealers obliged to bid at government auctions. “These low yields are responsible for the lack of fiscal reform in the face of Japan’s worsening finances. Policy makers think they can keep borrowing without problems.”

Even with a planned sales-tax increase in April, Japan’s government has yet to present detailed proposals on how to consolidate its finances, the International Monetary Fund said last month. The BOJ’s decision last week to press on with unprecedented bond buying helped cut the five-year JGB yield to an almost seven-month low of 0.19 percent, below the 2 percent inflation rate that central bank Governor Haruhiko Kuroda said is likely to be achieved in 2015.

Spending Contained

The dropoff in trading contrasts with last year, when the monthly average of JGB sales and purchases among lenders, life and casualty insurance companies jumped to a record 98 trillion yen in the second quarter, the JSDA data show.

Finance Minister Taro Aso said on Nov. 1 that declines in bond yields weren’t expected.

The cabinet unveiled a 5 trillion-yen economic plan on Oct. 1 to offset impacts from a sales tax increase to 8 percent from 5 percent in April. Prime Minister Shinzo Abe, counting on fiscal and monetary stimulus to end 15 years of deflation, has yet to decide on whether to go ahead with the second planned increase to 10 percent by 2015.

The tax change “is a welcome step,” the IMF said in its Fiscal Monitor report released Oct. 9. Even so, the planned stimulus measures “put a premium on developing a concrete and credible medium-term plan as quickly as possible.”

Quadrillion Yen

Japan’s public debt has ballooned to more than 1 quadrillion yen and is estimated by the Washington-based IMF to grow to the equivalent of 244 percent of the nation’s gross domestic product this year. That compares with a ratio of 106 percent in the U.S.

The BOJ is likely to step up its easing program between April and June next year to shield the economy from the higher levy, according to 25 of 34 economists in a Bloomberg survey conducted Oct. 23-28.

The central bank said last week the country is on track to hit its 2 percent inflation target. Prices excluding fresh food are projected to rise 1.3 percent in the year from April, the BOJ expects, after accounting for the effect of the sales-tax increase.

Higher costs of living typically erode real yields, or what bondholders earn after inflation, damping the appeal of the currency needed to buy them. The difference between 10-year JGB yields and the most recent inflation rate in Tokyo was about 0.3 percentage point, near the lowest since December 2008.

Real Yields

“The BOJ’s priority is to lower Japan’s real interest rates and ensure an end to deflation, even if they have to sacrifice liquidity and trading volumes in the bond market,” Takatoshi Kato, a former top currency official at Japan’s Ministry of Finance said in an interview on Oct. 31 in Tokyo.

“The decline in real yields would be a factor to weaken the yen,” according to Kato, who is now the president of Japan’s Center for International Finance.

The yen has tumbled 18 percent against the dollar in the past year to trade at 98.44 as of 3:45 p.m. in Tokyo today, the worst performance among 16 major counterparts. The currency will weaken to 110 per dollar by the end of next year, according to the median estimate of analysts in a Bloomberg poll.

Price Swings

The BOJ’s decision on April 4 to double monthly bond buying to more than 7 trillion yen and remove limits on maturities that it acquires initially triggered a jump in market volatility. The benchmark five-year yield fell to a record 0.095 percent on March 4 before surging to a two-year high of 0.455 percent on May 15. It has declined since then as the central bank kept buying debt.

“Market functions are sacrificed for the sake of ending deflation,” said Izuru Kato, the Tokyo-based president of Totan, a research unit of money-market broker Tokyo Tanshi Co. A reduction in monetary stimulus could cause a drop in bond prices, which “will make it difficult for the BOJ to normalize policy,” he said.

Such a risk has already been seen in the U.S., where Federal Reserve Chairman Ben S. Bernanke’s comment in May on the possibility of slowing bond purchases spurred an almost 1 percentage point surge in 10-year Treasury yields in the following months.

Historical price volatility of JGBs dropped to 1.56 percent last week, a level unseen since Feb. 8 and down from a five-year high of 3.98 percent on June 25.

“Liquidity has evaporated as the BOJ has gobbled up most of the market,” Nicholas Spiro, the London-based managing director of Spiro Sovereign Strategy, wrote in an e-mail. “To all intents and purposes, there is no JGB market.”

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net; Yumi Ikeda in Tokyo at yikeda4@bloomberg.net

To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net


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