BOJ’s ¥23 trillion JGB spree sees record gains

Bloomberg

Japanese government bonds are headed for the longest run of annual gains on record, buoyed by central bank purchases almost equivalent to Malaysia’s economic output.

The bonds have returned 2.1 percent on an annualized basis in 2012, set for a ninth year of gains that’s the longest streak since at least 1986, a Bank of America Merrill Lynch index shows. Ten-year yields have declined 22 basis points to 0.76 percent. U.S. Treasuries are poised to post a third annual gain with a 2 percent return, while the benchmark rate has fallen 10 basis points.

The Bank of Japan’s JGB holdings increased by ¥22.6 trillion ($267 billion) in 2012 as it sought to pump funds into a deflation-plagued economy that contracted for two quarters through Sept. 30. With incoming Prime Minister Shinzo Abe planning a “large-scale” extra budget to bolster growth, analysts forecast the 10-year yield will rise to 0.99 percent by the end of 2013, a Bloomberg survey shows, which would still be the third-lowest globally.

“Public-works spending will kick-start the economy” under an Abe administration, said Koichi Kurose, chief economist in Tokyo at Resona Bank Ltd., which oversees about $178 billion. “But the BOJ will increase asset purchases to keep a lid on borrowing costs.”

Abe, the Liberal Democratic Party chief, will become prime minister in a special Diet session Wednesday, after his party’s coalition won a majority in the Dec. 16 general election. It will be his second prime ministership, the first ending in September 2007.

The world’s third-largest economy is likely to resume growth from the first three months of next year, while consumer prices will probably continue to fall at least through June, according to median estimates of economists surveyed by Bloomberg. The government will strike an “accord” with the central bank that will have a 2 percent inflation target, the LDP said in its election pledges.

The central bank, which set an inflation goal of 1 percent in February, will discuss “medium- to long-term price stability” at its next meeting in January, the BOJ said in a statement after a two-day policy meeting that concluded Thursday. BOJ Gov. Masaaki Shirakawa, who’s due to step down in April, and his board voted to add ¥10 trillion to its ¥66 trillion program that buys securities, including government debt maturing in three years or less.

The BOJ had ¥112.8 trillion in government securities as of Thursday. The holdings reached ¥113.7 trillion 10 days earlier, the most at least since 1997, BOJ figures compiled by Bloomberg show.

The yen has fallen about 5 percent since Nov. 15, when Abe called for unlimited cash infusions by the BOJ to end deflation. Departing Prime Minister Yoshihiko Noda dissolved the Lower House the next day, spurring this month’s election. The currency traded at 84.71 per dollar as of 12:05 p.m. in Tokyo after earlier touching 84.96, the weakest since April 2011.

The benchmark 10-year bond yield rose 3½ basis points last week, or 0.035 percentage point, to 0.76 percent. It fell to 0.685 percent on Dec. 6, the least since June 2003, when all-time lows were set.

The Finance Ministry will auction ¥2.7 trillion in two-year notes Wednesday in its last debt offering this year. Yields on government notes maturing in one to three years have collapsed to about 0.1 percent amid purchases by the BOJ.

The LDP may unveil an extra budget of as much as ¥10 trillion to fuel growth, according to separate estimates by Barclays PLC and Bank of America Merrill Lynch. The party has also proposed ¥15 trillion in steps to defend against natural disasters, a plan posted on the LDP’s website shows.

The nation’s consumer prices excluding fresh food have fallen at an average of 0.2 percent every month in the past 10 years, reducing wages and discouraging consumer spending. Households held ¥840 trillion in cash and bank deposits at the end of September, up 9.4 percent from 2002, central bank figures show.