Climbing bond yields push BOJ on money supply

The Bank of Japan has affirmed a plan to double the country’s monetary base over two years after a jump in bond yields highlighted risks associated with Prime Minister Shinzo Abe’s campaign to revive the economy.

The central bank will expand the supply of money in the economy by 60 to 70 trillion yen ($683 billion) a year, as pledged in April, the BOJ said in Tokyo yesterday. Twenty-six of 27 economists in a Bloomberg News survey had forecast no change. The BOJ didn’t comment on bond prices, switching attention to Governor Haruhiko Kuroda’s press briefing in Tokyo.

The biggest surge in government debt yields in five years threatens to undermine the BOJ’s stimulus efforts, with companies including steelmaker JFE Holdings pulling bond sales amid the volatility. The central bank raised its assessment of the economy, as a sliding yen and gains in the stock market aid Abe’s efforts to boost wages and prices and pull the nation out of a 15-year deflationary malaise.

“The BOJ wanted to avoid causing any speculation that it may change course on a policy of massive expansion,” said Mari Iwashita, a bond strategist at SMBC Nikko Securities, commenting on the absence of any reference to rising debt yields. “The focus is on how Kuroda will address this at the press conference.”

Ten-year government debt yields rose to 0.87 percent in Tokyo. That compared with a high of 0.92 percent last week.

The yen was little changed at 102.65 per dollar, down 16 percent for the year, a slide that’s bolstered the competitiveness of Japanese exporters while making the cost of imported goods such as energy more expensive.

Kuroda said at a government meeting on May 20 that it’s natural for yields to rise gradually as the outlook for the economy and prices improves, an official told reporters.

Economists including Naohiko Baba, chief Japan economist at Goldman Sachs Group, say the BOJ could expand easing in October, when price forecasts will indicate the degree of progress that it has made toward 2 percent inflation in two years.
Consumer prices in Japan slid 0.5 percent in March from a year before, excluding volatile fresh-food costs, highlighting the gap the BOJ has to bridge. BOJ board members last month predicted that prices would rise 1.9 percent in the fiscal year starting in April 2015, leaving out the impact of a planned sales-tax increase, their median forecast showed.

Toyota Industries scrapped a plan to sell 20 billion yen of seven- and 10-year bonds, Nomura Securities, which was managing the deal, said May 15. JFE Holdings withdrew a 10- year note offering on the same day, citing market volatility, according to a person familiar with the matter.

“If abrupt moves in yields continue, that will influence companies’ ability to raise funds,” Hiromasa Yonekura, the chairman of Sumitomo Chemical and head of Keidanren, Japan’s biggest business lobby, said at a press conference on May 20. The government should “contain the volatile moves” while also being clear about “its commitment to achieve fiscal health,” he said.

Yields on benchmark 10-year government securities climbed about 23 basis points in the two weeks through May 17, the biggest such advance since May 2008, according to data compiled by Bloomberg. The Japanese central bank, set to buy 70 percent of the debt sold by the government each month, stepped in on May 15 to limit the decline in prices, announcing a 2.8 trillion yen infusion of funds.

Price volatility for Japanese government bonds surged 2.6 percentage points this year to 3.65 percent yesterday, the biggest advance among 26 sovereign-debt markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.

Bloomberg