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Kuroda seen limiting ’14 losses as JGB run ends

by Kevin Buckland, Mariko Ishikawa, and Shigeki Nozawa

Bloomberg

Bank of Japan Gov. Haruhiko Kuroda has scope to increase unprecedented stimulus, limiting losses on Japanese government bonds in 2014 as global sovereigns slump, economists predict.

Ten-year JGB yields will rise to 0.87 percent by the end of 2014 — they reached a three-month high of 0.715 percent Monday — while the average for Group of Seven peers will climb 27 basis points next year to 3.205 percent, the median forecasts of analysts surveyed by Bloomberg News show.

Japan’s benchmark bond would deliver a 0.7 percent loss to investors in that scenario and end 10 consecutive years of gains for the JGB market.

The BOJ, which has been buying about 70 percent of new debt sold to investors since April, has scope to expand purchases even more, according to 71 percent of economists polled by Bloomberg. Adding to stimulus may become necessary after April when the first of two rises in the consumption tax will take effect, an increase that will probably cause the economy to shrink in the second quarter, according to analyst forecasts.

“As long as the Bank of Japan keeps easing, it’s hard to imagine yields rising much,” said Satoshi Yamada, a manager of debt trading at Okasan Asset Management Co., which oversees the equivalent of $11 billion. “Ten-year yields are unlikely to rise above 1.1 percent next year.”

The 10-year yield rose 1.5 basis points to 0.72 percent as of 1:30 p.m. Monday in Tokyo, the highest since Sept. 18. It is still set for the lowest yearend close in data compiled by Bloomberg going back to 1985. Japan’s sovereign debt returned 2.2 percent through last Friday, extending a run of annual gains to a 10th year, the longest stretch in data that began in 1986, according to a Bank of America Merrill Lynch index. That compares with a 0.4 percent loss on global sovereigns.

Kuroda drove the benchmark yield to a record low of 0.315 percent on April 5, the day after he pledged to end 15 years of deflation by doubling monthly bond buying to more than ¥7 trillion.

“Deflation was not only a result of economic stagnation but also a cause that protracted economic stagnation,” Kuroda told the Keidanren business lobby on Dec. 25. He said the BOJ must work on managing expectations to beat the “vicious cycle” of falling prices.

Consumer prices excluding fresh food rose 1.2 percent in November from a year ago, bringing the rate closer to the monetary authority’s 2 percent target, government data showed Dec. 27. BOJ policymakers predict that gains in core prices, stripped of the effects of the coming sales tax increase, will accelerate to 1.3 percent in fiscal 2014, and to 1.9 percent the following year.

It “may be difficult” to declare an end to deflation during 2014, and the timing will depend on factors such as overseas economic conditions, vice economy minister Yasutoshi Nishimura said Friday.

The yield gap between nominal paper and similar maturity inflation notes signals a 1.08 percent annual increase in consumer prices over 10 years, according to the break-even rate.

“The BOJ would have to take some kind of initiative if it starts to look unlikely that its 2 percent inflation target in two years can be achieved,” said Okasan’s Yamada.

Policymakers see significant scope to boost bond buy if necessary, according to sources. More than half of the 37 economists in Bloomberg’s survey see the BOJ adding to stimulus by June.

The BOJ estimates that its current account balance — deposits by financial companies — rose to a record ¥107 trillion Monday.

Takeshi Fujimaki, who once advised billionaire investor George Soros and now holds a seat in the Upper House, said additional monetary easing may have the opposite of its intended effect, and trigger a bond selloff.

“If Mr. Kuroda does additional measures, maybe the market will think it’s monetization,” Fujimaki said earlier in December. “I’m very concerned about the JGB market’s reaction — it’s very dangerous.”

The government plans to reduce annual bond sales for the first time in six years in the 12 months starting April 1 to ¥155.1 trillion, from a record ¥156.6 trillion in the initial plan for the current fiscal year, the Finance Ministry said last week. Japan has the world’s biggest debt burden, at more than twice the size of its economy.

The BOJ’s record bond buying initially triggered a jump in bond market volatility, which declined after the bank began meetings with investors and increased the frequency of purchase operations. Historical volatility dropped to a 10-month low of 1.381 percent on Dec. 24 on a 60-day basis, down from a five-year high of 3.975 percent on June 25.

The cost to protect JGBs against nonpayment declined to 40 basis points Friday, the lowest since September 2009.

The stimulus has also made the yen the worst performing Group of 10 currency versus the dollar for a second year, declining 18 percent to a five-year low of 105.41 per dollar, and helped drive a 51 percent rally in the Topix as Japanese stocks beat every other developed market in 2013.

The challenge for policymakers will be sustaining the economy’s momentum after the consumption tax increases. Economists see growth slowing to a 1.6 percent annualized pace in 2014, and 1.2 percent in 2015, from 1.8 percent this year.

“Looking at the year ahead, I can’t find any factors that would significantly boost confidence in Japan’s economy,” said Toru Yamamoto, the chief strategist at Daiwa Securities Co.