Fujii’s Debt Sales Meet Insurers’ Buying Surge, Capping Yields
Japan’s four largest life insurers plan to buy more local debt on concerns the economic recovery will be weak, helping cap yield gains amid speculation the government will increase record bond sales as tax revenue falls.
Japan’s Finance Minister Hirohisa Fujii said Oct. 20 the budget deficit for the year ending March may be “quite large” as tax revenue declines, an indication bond sales could exceed 50 trillion yen ($555 billion). Analysts in a weighted Bloomberg survey forecast the 10-year yield will increase to 1.48 percent by the end of March, from 1.365 percent as of 9:34 a.m. in Tokyo.
Demand for government bonds may rise with real returns, what investors receive after adjusting for living costs, near the highest since 1995. Nippon Life Insurance Co., Dai-ichi Mutual Life Insurance Co., Meiji Yasuda Life Insurance Co. and Sumitomo Life Insurance Co. this month said they will add to domestic bond holdings, opting for safer assets as the world’s second-largest economy recovers from its worst postwar recession.
“Domestic investors are still willing to buy JGBs to seek stable earnings,” according to RuiXue Xu, a rates strategist in Tokyo at RBS Securities Japan Ltd., one of the 23 primary dealers required to bid at government auctions. “Strong buying demand from domestic investors should cap yield increases.”
Unemployment Climbing
Government reports next week are forecast to show gains in production slowed and the nation’s unemployment rate climbed to match a record last month.
“We’re still not at a stage where we can increase our bets on asset classes that are riskier,” such as equities, Akinao Nishio, a manager in the investment planning division at Dai- ichi Mutual said in an interview on Oct. 13. “The market is still expecting to hit another bottom, so we have to watch for possible risks.”
Factory output rose 0.8 percent in September after climbing 1.6 percent the prior month, according to the median estimate of economists in a Bloomberg survey before the Oct. 29 report. The jobless rate increased to 5.7 percent, a separate survey showed before the statistic bureau report on Oct. 30.
Japanese consumer prices, excluding fresh food, dropped 2.4 percent in September, according to the median estimate of economists in a Bloomberg survey. That means that real yields will climb to 3.76 percentage points.
Nine-year notes protected against inflation yielded 1.29 percentage points more than similar-dated regular notes today, compared with 1.23 percentage points a week ago, Bloomberg data showed. Inflation-adjusted securities typically yield less than regular bonds because their principal payment increases at the same rate as inflation.
Nikkei Recovery
The Nikkei 225 Stock Average jumped 25 percent in the fiscal first half ended Sept. 30, rebounding from its biggest annual decline in the 12 months ended March 31. Japan’s trade recovery may be curtailed after the yen gained versus all 16 major currencies this year, making exporters’ products more expensive and eroding the value of profits earned abroad.
The recent recovery in equity markets is due mostly to global efforts to stabilize the financial industry through stimulus packages and the next key step to watch for will be revenue increases at companies, according to Sumitomo Life, Japan’s fourth-largest life insurer.
“Domestic bonds continue to be a good investment as part of our policy to focus on asset liability management,” Iwao Matsumoto, deputy general manager of investment planning at Sumitomo Life said in an interview on Oct. 14. “Overseas bonds with currency hedges are a good bet in this market environment, as costs to hedge currency moves are relatively cheap.”
Cheap Hedging Costs
The difference between domestic and foreign short-term borrowing costs, which determines fees to hedge securities, is narrowing, boosting the attraction of overseas debt relative to Japanese sovereigns. The gap between the London interbank offered rate for yen and dollar loans for six months was five basis points today, down from this year’s high of 116 basis points reached in March, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
“Japanese life insurers remain focused on long-term JGBs and currency hedged foreign bonds in their investment plans,” said Masafumi Yamamoto, Tokyo-based chief foreign-exchange strategist at Barclays Bank Plc. “This reflects their cautious stance on market volatility, as well as the favorable which to invest in long-term foreign bonds.”
The yen traded at 91.41 per dollar, weakening 0.6 percent from 90.89 on Oct. 16 in New York.
