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Shirakawa revival sought amid rout: Japan Credit

JGB losses under new BOJ governor said worst since 2004 hit

Bloomberg

Bank of Japan Gov. Haruhiko Kuroda’s success in fueling inflation expectations has caused some investors to seek a revival in his predecessor’s policies to temper the worst Japanese government bond losses in nine years.

JGBs maturing in more than 10 years have lost 3.8 percent so far this quarter, the most since the period that ended in June 2004, according to a Bank of America Merrill Lynch index.

That compares with a first-quarter gain of 6.4 percent, the most since 2008, when Masaaki Shirakawa was head of the BOJ. Similar-maturity Treasuries are set for a 1.8 percent decline this quarter.

“Bond investors used to be in a comfortable lukewarm bath, relying on the BOJ” before Kuroda, said Kazuya Ito, head of fixed income at Daiwa SB Investments Ltd. “If the BOJ adopts some of Shirakawa’s recipe, investors will be relieved.”

Kuroda doubled bond purchases and expanded the debt bought to all maturities from one to three years under Shirakawa, escalating a campaign to end 15 years of deflation that his predecessor said the BOJ alone can’t defeat. The BOJ Policy Board is divided over whether to quell market volatility by doubling to two years the maturity of 0.1 percent loans it extends to banks, sources said.

Fifteen of 17 analysts in a Bloomberg survey either forecast that the BOJ will approve two-year operations at the next meeting on Monday and Tuesday or say that such a move is possible.

The BOJ on April 4 announced monthly JGB purchases of more than ¥7 trillion with maturity of as long as 40 years to achieve 2 percent inflation in two years. In contrast, Shirakawa’s asset-purchase program introduced in October 2010 was focused on one- to three-year government notes.

The BOJ offered ¥2 trillion in one-year loans on May 23 when 10-year yields jumped to a one-year high of 1 percent. The BOJ said at the time that the operation was intended to counter excessive volatility in the bond market.

“Yields across the curve will stabilize if rates at the short end are anchored like they were under Shirakawa’s APP program,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. “The BOJ can say at next week’s meeting they have the capacity to extend the fixed-rate fund operation to up to three years if needed as a last resort.”

Three-year bond yields have risen to 0.139 percent from 0.045 percent on March 19, when Shirakawa stepped down. Benchmark 10-year rates fell two basis points, or 0.02 percentage point, to 0.835 percent Thursday.

Longer-term BOJ loans would be similar to the European Central Bank’s long-term refinancing operation, or LTRO.

Some BOJ officials are concerned that doubling fixed-rate loan maturities would return the bank to a pattern of incremental steps that failed in the past, according to sources familiar with the discussions. An opposing view is that the step is a useful backup in case of a spike in fluctuations in the government bond market, the sources said, asking not to be named because the talks are private.

An extension of the BOJ’s 0.1 percent loan will allow financial institutions to buy government bonds with lower costs, said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

“I personally think that will do more harm than good,” said Inadome in Tokyo. “Offering money to buy bonds would contradict the BOJ’s efforts aimed at shifting funds away from JGBs. One of the reasons for the current volatile market is contradictory policy.”

Historical price volatility of Japan’s one- to five-year notes climbed to 0.7 percent Friday, the highest since March 2011, according to Bloomberg data based on 60-day reading. It slid to 0.15 percent in December, the lowest on record going back to 1994, when Shirakawa was at the helm of the BOJ.

“Kuroda’s priority is focused on raising expectations” of future inflation, said Izumi Devalier, a Japan economist at HSBC Holdings Plc in Hong Kong. “If the side effect for an aggressive policy that’s needed to raise expectation is market volatility, it was a risk that he was willing to take.”