Reserve Bank Governor Glenn Stevens is giving Japanese money managers grounds to slow their rush back into Australian bonds by targeting a weaker currency.
Mitsubishi UFJ Asset Management Co., Daiwa SB Investments Ltd. and Mizuho Asset Management Co. say demand may be affected by Stevens’s signaling that he’d prefer the currency to fall about 4.7 percent to 85 U.S. cents. Japanese investors bought a net 129.9 billion yen ($1.25 billion) of Australian government bonds in October, the most since May 2012, based on the latest data from the Ministry of Finance in Tokyo.
“I’m quite bearish on the currency,” said Hideo Shimomura, who helps oversees the equivalent of $67.9 billion as chief fund investor at Mitsubishi UFJ Asset in Tokyo, part of Japan’s largest publicly traded bank. “The Japanese are not really coming back to Australian assets. Yields are quite attractive, but people who have concerns about the currency are not in the market.”
A Japanese reluctance to add more debt would aid the RBA in its drive to counteract a slowing economy by jump-starting non-mining investment through record-low interest rates and a weaker Aussie. The yen and Australia’s dollar have recorded the worst losses against the U.S. currency this year among 10 major peers and analysts predict declines will continue in 2014, data compiled by Bloomberg show.
Shimomura said he would like to buy 10-year bonds if the yield rises to 4.5 percent.
Australian 10-year yields climbed to 4.44 percent this month, a two-year high, and they were 4.24 percent as of 12 p.m. in Sydney. The yield compares with 0.67 percent in Japan, providing incentive to buy for investors who can withstand the foreign-exchange risk.
The Aussie dollar, the world’s fifth most-traded, was at 92.99 yen, up 3.1 percent since Dec. 31. It bought 89.17 U.S. cents after falling 14 percent this year.
The median of forecasts compiled by Bloomberg News is for the currency to fetch 95.90 yen and 88 U.S. cents by end-2014.
Japanese investors held about A$180 billion in Australian dollar debt at the end of last year, the latest Bank of Japan figures show. The data don’t specify what proportion are government securities. Australia had A$267 billion of government securities outstanding at the end of 2012, according to the nation’s funding unit.
Stevens said this month he would prefer the currency to fall to 85 U.S. cents, in an interview with the Australian Financial Review. The RBA governor has repeatedly emphasized his outlook for Aussie declines over the past two months and said Dec. 18 in Parliament that he’s also open to further rate cuts if needed.
Kei Katayama, who buys non-yen debt in Tokyo for Daiwa SB, said he trimmed his holdings of Australian dollar bonds a few weeks ago due to the central bank’s currency stance. Japanese demand for Australian assets may increase as the Aussie falls toward Stevens’ desired level, he said.
“The weak yen is supporting investment in foreign assets,” said Katayama of Daiwa SB, which manages the equivalent of $47.9 billion. “Looking at yields, this level is quite attractive.”
Bank of Japan Governor Haruhiko Kuroda is pursuing polices that helped drive the yen down 17 percent against the U.S. dollar, poised for its biggest drop since 1979. The BOJ is pumping more than 7 trillion yen a month into its economy to spur growth, and officials said this month there is scope to do more if needed.
Interest-rate swaps indicate there’s about a 30 percent chance of the RBA cutting its benchmark from a record-low 2.5 percent to 2.25 percent or less in the first half of next year.
Mizuho Asset has positions that will benefit if the Aussie currency falls, allowing it to maintain previous bond holdings, which they don’t plan to add to, said Yusuke Ito, a senior fund manager for the company in Tokyo. The duration of Mizuho’s holdings in Australian bonds has been longer than the index it uses to gauge performance for a few years, he said.
“The unemployment rate is at a very high level,” said Ito, who helps oversee the equivalent of $32 billion at the company. “There is still a possibility for them to lower rates. We’re bullish” on the bonds.
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