Shinzo Abe, the front-runner to become Japan’s next prime minister, is helping drive an almost tripling of foreign bond buying by local investors as he calls for central bank steps to fuel inflation and weaken the yen.
Net purchases of overseas debt climbed 285 percent to 15.2 trillion yen ($185 billion) this year through Nov. 17, Ministry of Finance data show. Japan’s currency dropped 5.1 percent this quarter, boosting import costs and eroding demand for local securities. While Japan’s 20-year bond yield has climbed 1 1/2 basis points to 1.66 percent since the end of September, it’s lower than the 2.3 percent on similar-maturity U.S. Treasuries.
The opposition Liberal Democratic Party’s Abe has called on the Bank of Japan to pump unlimited cash into the market to kindle inflation, sapping demand for longer-dated bonds before elections next month. The extra yield investors demand to hold Japan’s 20-year debt instead of 10-year bonds rose to a 13-year high on Nov. 16, according to data compiled by Bloomberg.
“Investors are going abroad for higher yields because of declining interest incomes” caused by the BOJ’s monetary easing, said Shuntaro Take, the deputy general manager for the corporate accounting and investment department at Tokio Marine & Nichido Life Insurance Co., which manages about $47 billion in Tokyo. “Stronger expectations for effective policies from the Abe administration would put the yen in a weakening trend, increasing foreign-bond investments even more.”
Abe, who was the prime minister for a year through September 2007, said yesterday that the Bank of Japan isn’t taking responsibility for the real economy. He called for adding a mandate to spur inflation as part of any changes to the law governing the central bank. The BOJ aims for annual inflation of 1 percent.
The government “strongly” expects the central bank to continue powerful monetary easing to overcome deflation, while the bank hopes for measures from the government to strengthen Japan’s growth potential, Economy Minister Seiji Maehara, Finance Minister Koriki Jojima and BOJ Governor Masaaki Shirakawa said in a statement on Oct. 30.
A Nikkei newspaper poll on Nov. 16-18 showed that 37 percent of the respondents supported Abe becoming the next prime minister, compared with 25 percent for Yoshihiko Noda, the current premier. The nation will hold elections on Dec. 16 for the lower house of parliament.
“An Abe-led administration may create a bigger flow to foreign bonds because of possible capital gains from exchange rates on top of yield differentials,” said Shinji Kunibe, chief portfolio manager for fixed-income investment in Tokyo at Nissay Asset Management Corp., which oversees the equivalent of $62 billion. “Investors had been unable to foresee any sustainable yen weakness until recently.”
Elsewhere in Japan’s credit markets, Fujifilm Holdings Corp. raised 130 billion yen yesterday in its first sale of non- convertible bonds, the nation’s biggest debt offering by a non- financial company since March. The Tokyo-based copier and camera maker issued three tranches, including 60 billion yen of 0.33 percent five-year notes, data compiled by Bloomberg show.
Toho Gas Co., which supplies gas to the Nagoya metropolitan area in central Japan, offered 10 billion yen of 0.792 percent 10-year debt, according to a statement yesterday from Daiwa Securities Group Inc.
Japan’s corporate bonds have handed investors a 0.14 percent loss this month, compared with a 0.21 percent return for sovereign notes, according to Bank of America Merrill Lynch index data. Company debt worldwide has gained 0.13 percent.
The yen dropped to 82.84 per dollar last week, the weakest since April 4, and traded at 81.95 as of 10:42 a.m. in Tokyo.
Sixteen of 22 economists surveyed this month by Bloomberg News forecast the BOJ will expand monetary easing at its next meeting on Dec. 19-20. The central bank refrained on Nov. 20 from increasing the 66 trillion-yen asset-purchase program that buys securities including government debt maturing in three years or less.
A government auction of two-year notes yesterday drew bids valued at 13.9 times the amount on offer, near a seven-year high. The BOJ’s purchases have driven down one- to three-year yields to about 0.1 percent, almost matching the rate that banks charge each other for overnight loans in the money market.
The nation’s 20-year debt yields climbed to 95 basis points above 10-year securities on Nov. 16, the highest since July 1999, steepening the so-called yield curve. One basis point is 0.01 percentage point.
“Abe’s remarks on extreme reflationary policy are leading to speculation of a substantial expansion in the BOJ’s monetary easing, which is causing short-term yields to fall,” said Tokio Marine’s Take. “This sort of policy may boost inflation expectations.”
Among the 12 sovereign markets tracked by the Ministry of Finance, France attracted the most demand from Japanese investors after the U.S. They bought a net 2.84 trillion yen of long-term French government debt this year through September. That would be the largest yearly purchase on record going back to 2005.
Japanese investors increased holdings of France’s bonds even after Standard & Poor’s in January stripped the nation of its AAA rating. Moody’s Investors Service followed on Nov. 19, cutting the nation’s Aaa grade to Aa1 with a negative outlook.
Kokusai Asset Management Co.’s Global Sovereign Open Fund boosted its holdings of France’s debt in the year through October to 2.2 percent of the total after selling them at the height of the region’s financial woes in 2011, according to reports posted on the company’s website. The $18.2 billion fund cut German and Dutch debt by 2.2 percentage points and 2.3 percentage points respectively during the same period.
France’s 10-year bonds yield 2.2 percent for Japanese investors who hedge against a fluctuation in the euro. Rates on similar-maturity debt in Japan were 0.72 percent today, matching the nine-year low reached July 23.
“I’m relatively optimistic about Europe now because the region’s debt crisis is unlikely to spark a crash in the financial market,” said Masataka Horii, who runs Asia’s biggest bond fund at Kokusai in Tokyo. France’s bonds are one of the sovereign securities he would consider buying if he decides to add to his euro-holdings, he said.
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