Forecasts see more Bank of Japan bond buyingAs the U.S. Federal Reserve prepares to pare its bond buying, brokerages expect the Bank of Japan (BOJ) to do the opposite, stepping up short-term debt purchases and heading off any increase in yields.
Bank of America Merrill Lynch and JPMorgan Chase & Co. said the BOJ may increase the bills it buys directly from the government next fiscal year, in line with its doubling of purchases from the market.
Average yields on Japanese government bonds maturing in up to 10 years have fallen three basis points since the end of June to 0.31 percent, while similar maturity Treasuries rose 12 basis points to 1.21 percent, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies.
The forecasts for more bond purchases next year suggest that the impact of the BOJ’s monetary stimulus will intensify as it strives to end 15 years of deflation. The purchases may cap borrowing costs in the world’s third-largest economy, while debt yields rise elsewhere as the Fed begins to taper stimulus in the United States, according to Bank of America.
“Increased underwriting could reduce the supply of bonds to the market, so along with the BOJ’s purchases in the market, it would be a factor in lowering yields,” said Shuichi Ohsaki, a rates strategist in Tokyo at the U.S. bank, which is one of the 23 primary dealers obliged to bid at Japanese government debt auctions. “Lots of investors would struggle to find Japan Government Bonds that they can buy.”
While Japanese law prohibits the government from borrowing directly from the central bank, exceptions can be approved by the parliament under “special” circumstances. The scale of debt underwriting, limited to one-year bills, is usually equal to JGBs acquired by the BOJ from the market that are coming due, according to Bank of America.
The central bank on April 4 doubled its monthly bond purchases from the market to more than 7 trillion yen ($72 billion) to stoke 2 percent inflation in two years. The BOJ’s underwriting in the fiscal year started April will total 11.7 trillion yen, the Ministry of Finance said. Bank of America expects that to swell to as much as 25 trillion yen next year.
The yield on Japan’s benchmark five-year note advanced half a basis point, or 0.005 percentage point, to 0.285 percent Monday, near the least since May. The 10-year yield fell half a basis point to 0.76 percent today after dropping to a three-month low of 0.73 percent last week.
The yields may stay around these levels through the rest of this year, said Takafumi Yamawaki, the Tokyo-based chief rates strategist at JPMorgan, another primary dealer.
“The amount of debt that the BOJ buys from the government is determined politically, but it’s more likely to increase,” Yamawaki said.
Elsewhere in Japan’s credit markets, Toyota Industries hired banks for a sale of 10 billion yen each of seven-year and 10-year bonds this month, according to a statement yesterday from Nomura Holdings, which is managing the deal with three other brokerages. The maker of auto parts offered 10-year securities in November with a coupon of 0.821 percent.
Japanese corporate bonds have handed investors a 0.06 percent gain this month, compared with a 0.12 percent return on sovereign notes, according to Bank of America Merrill Lynch index data. Company debt worldwide has lost 1.08 percent.
A 400 billion yen auction of 40-year government bonds yesterday attracted bids valued at 3.37 times the amount available, a higher ratio than the previous sale in May, according to Ministry of Finance data. Demand in May was the weakest since August 2011.
Finance Minister Taro Aso last month said the government will present Japan’s medium-term fiscal plan at the Sept. 5 to 6 summit of Group of 20 nations in St. Petersburg.
The government will decide whether to go ahead with a planned consumption-tax increase pending the Sept. 9 release of revised second-quarter growth figures.
A preliminary reading released last week showed gross domestic product expanded 2.6 percent in the April-June period, down from 3.8 percent in the first quarter.
Rating & Investment Information said on Aug. 15 that a delay in fiscal consolidation would blur the boundary between fiscal and monetary policy in Japan.
Extra spending financed by debt issuance may prompt the Tokyo-based ratings company to lower the outlook on its AA+ grade on the sovereign to negative from stable, it said in a statement.
The Cabinet Office said in a report last week that deflation is ending. Consumer prices excluding fresh food rose 0.4 percent in June from a year ago, the biggest annual increase since November 2008, statistics bureau data showed last month. July figures are due on Aug. 30.
The break-even rate, a measure of investor expectations for inflation, indicates annual price increases of 1.4 percent in the next five years, within half a percentage point of the highest on record going back to 2009, Bloomberg data show.
An increase in the consumption tax will raise consumer prices, helping to boost the inflation rate temporarily, said Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank.
“I’m worried that policy makers will misread the sales levy-fueled rise in consumer prices as being driven by economic strength,” said Sera, whose company manages the equivalent of $139 billion in corporate pensions. “The risk is that the BOJ will seek a premature exit from its unprecedented easing, and we’ll head back into a deflationary spiral.” Bloomberg
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