Business / Financial Markets

Kuroda's 'big bazooka' drives down yields as GPIF to sell

Bloomberg

The Bank of Japan’s expanded monetary easing came just in time to spur a bond rally even as the ¥126 trillion Government Pension Investment Fund starts to cut debt holdings.

The 20-year yield dropped about 15 basis points in two days to the lowest since April 2013 after the BOJ unexpectedly increased purchases of government bonds to a record annual pace of ¥80 trillion last week.

That came just hours before the GPIF, the world’s biggest pool of retirement savings, said it will reduce its domestic debt allocations to 35 percent of assets from 60 percent.

Stocks rallied and the yen slumped as BOJ Gov. Haruhiko Kuroda sought to push yields lower and drive investors into riskier securities amid doubts he can achieve a goal of 2 percent inflation.

The move contrasts with the U.S. Federal Reserve’s decision last week to end a third round of quantitative easing because of an improved labor market.

“Haruhiko Kuroda has once again deployed the ‘big bazooka,’ ” Nicholas Spiro, managing director in London at Spiro Sovereign Strategy, wrote in an email response to queries. “This is ‘shock and awe’ from the BOJ, and carefully coordinated on the back of the end of QE3 in the U.S. and, more importantly, at the exact same time that the GPIF reforms were officially announced.”

Japanese government bonds returned investors 0.5 percent in October, a seventh month of gains that matched a streak which ended in September 2011, according to Bank of America Merrill Lynch data. The benchmark 10-year yield fell to 0.435 percent. On an intraday basis, the yield reached an unprecedented 0.315 percent on April 5, 2013. The 30-year yield declined 13 basis points to 1.39 percent.

The central bank, which unleashed unprecedented monetary easing 19 months ago, was previously targeting purchases of between ¥60 trillion and ¥70 trillion. The BOJ said it will continue easing as long as needed to achieve stable 2 percent inflation.

The monetary authority plans to buy ¥8 trillion to ¥12 trillion of Japanese government bonds per month under stepped-up stimulus. That gives Kuroda leeway to soak up the ¥10 trillion in new bonds that the Ministry of Finance sells in the market each month. The average remaining maturity of the JGBs bought by the BOJ will increase to about seven to 10 years, three years longer than previously, according to the plan.

Not everyone agrees the BOJ can keep yields from rising.

“It’s impossible for the BOJ to continue this policy for a long time,” said Noriatsu Tanji, chief rates strategist in Tokyo at RBS Securities Japan Ltd., one of the 23 primary dealers obliged to bid at government bond auctions. “It’s a short-distance race to reach the 2 percent inflation target so once that’s achieved, yields will rise higher.”

On the same day, a government report showed that inflation eased to the slowest pace in six months in September. The BOJ also reduced its estimate for the core consumer price index, which excludes fresh food, to 1.7 percent for the fiscal year through March 2016, from 1.9 percent in July.

Japan’s 10-year bonds will yield 0.65 percent at the end of March, according to Bloomberg survey of economists with the most recent predictions given the heaviest weightings.

The yen weakened as low as to 114.05 per dollar Monday after the BOJ’s decision.

GPIF, which manages the ¥127.3 trillion, revealed plans to reduce domestic bonds, while setting allocation targets of 25 percent each for Japanese and overseas equities, up from 12 percent each.

Under the new plan, GPIF will need to cut about ¥23.4 trillion of its domestic bond holdings to achieve the 35 percent target, according to data compiled by Bloomberg based on the plan. The fund’s new target allows for a 10 percent deviation. GPIF held ¥67.9 trillion of local debt, which accounted for about 53 percent of its portfolio as of the end of June.

The announcement of the BOJ’s added stimulus on the same day GPIF revealed its new investment plan was no coincidence, according to Takatoshi Ito, who led a government pension advisory panel last year.

“Everybody involved was on the same wavelength,” Ito said in a telephone interview from Bangkok. “It is quite a coordinated action, whether consciously or unconsciously. It was beautifully timed, and I would call it a Halloween treat.”

The pension’s previous strategy was designed on the assumption that deflation would continue, said GPIF President Takahiro Mitani on Friday. The new weightings are based on the expectation that consumer prices will rise, he said, adding that the BOJ’s bond-buying made it easier for GPIF to cut its allocation.

The yield gap between nominal paper and similar-maturity inflation notes signals a 1.097 percent annual increase in consumer prices over 10 years, about half of central bank’s target, according to the break-even rate.

“Even if GPIF were to sell a significant amount of Japanese government bonds, it would be absorbed by the BOJ,” said Shuichi Ohsaki, a rates strategist in Tokyo at Bank of America Merrill Lynch, one of 23 primary dealers obliged to bid at government bond auctions. “The BOJ’s big increase in Japanese government bonds is likely to push yields lower.”

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