Ja­pan seen stuck with neg­a­tive yields on 70pc of bonds for 2016

The Pak Banker - - 6BUSINESS -

TOKYO: Ja­panese pri­mary deal­ers say neg­a­tive bond yields are here to stay in 2016, and room for cap­i­tal gains has run out. Nine of 13 re­spon­dents to a poll con­ducted last week pre­dict the bench­mark 10-year Ja­panese gov­ern­ment bond yield will end the year be­low zero, af­ter sink­ing to a record mi­nus 0.135 per­cent on March 18. The lowest forecast of mi­nus 0.2 per­cent comes from Mor­gan Stan­ley MUFG Se­cu­ri­ties Co., while the me­dian of mi­nus 0.1 per­cent is in line with an­a­lyst es­ti­mates for Switzer­land.

Three years af­ter the start of the Bank of Ja­pan's un­prece­dented quan­ti­ta­tive and qual­i­ta­tive eas­ing, or QQE, and two months since the sur­prise an­nounce­ment of neg­a­tive in­ter­est rates, bond in­vestors are still try­ing to ad­just to the con­di­tions that have turned yields on 70 per­cent of the mar­ket neg­a­tive. Even amid such ex­treme mea­sures, the cen­tral bank has failed to pre­vent in­fla­tion from flatlin­ing for more than a year. Most of the deal­ers sur­veyed ex­pect a fur­ther ex­pan­sion of stim­u­lus.

"The BOJ has dom­i­nated the bond mar­ket," said Taka­fumi Ya­mawaki, the chief rates strate­gist in Tokyo at JPMor­gan Chase & Co., who sees the 10-year note yield­ing mi­nus 0.15 per­cent at year-end. "Yields will re­main deeply de­pressed."

An in­vestor would just about break even if the 10-year JGB yield ended the year at mi­nus 0.1 per­cent, af­ter ac­count­ing for rein­vested in­ter­est, ac­cord­ing to data com­piled by Bloomberg.

The 10-year yield was at mi­nus 0.095 per­cent at 10 a.m. in Tokyo on Mon­day, the lowest glob­ally af­ter Switzer­land's mi­nus 0.35 per­cent. The equiv­a­lent U.S. Trea­sury note yielded 1.9 per­cent. JGBs have re­turned 5.7 per­cent over the past six months, the most of 26 sovereign debt mar­kets tracked by Bloomberg, as yields pushed ever lower amid pres­sure from BOJ eas­ing.

"We ex­pect an ex­pan­sion of stim­u­lus, and if the mar­ket hap­pens to rule out any ad­di­tional boost in stim­u­lus, that would cre­ate an op­por­tu­nity to go long," said Takeki Fukushima, a rates strate­gist at Cit­i­group Global Mar­kets Ja­pan Inc. in Tokyo, who pre­dicts the 10-year note will yield about mi­nus 0.15 per­cent at year-end. The BOJ owns an un­prece­dented one-third of out­stand­ing JGBs, more than any other class of in­vestor, as it snaps up as much as 12 tril­lion yen ($106 bil­lion) of the debt each month. The re­sult has been a loss of liq­uid­ity that has height­ened volatil­ity and hurt mar­ket func­tion­al­ity.

Even so, in an­swer­ing Bloomberg's ques­tion­naire -- which didn't ex­plic­itly ask about the outlook for stim­u­lus -- eight of the 13 deal­ers said they ex­pect ad­di­tional eas­ing at some point.

Ja­pan has a to­tal of 22 pri­mary deal­ers, which the cen­tral bank calls "JGB Spe­cial Mar­ket Par­tic­i­pants," who are re­quired to bid at gov­ern­ment auc­tions and make a mar­ket for the debt.

In Bloomberg's most re­cent an­a­lyst sur­vey -- be­fore the BOJ's March meet­ing at which pol­icy set­tings were left un­changed -- 35 of the 40 re­spon­dents pre­dicted an ex­pan­sion of stim­u­lus by July. Makoto Suzuki, the se­nior bond strate­gist at Okasan Se­cu­ri­ties Group Inc., ex­pects the 10-year JGB yield to dip as low as mi­nus 0.25 per­cent be­fore end­ing the year at mi­nus 0.1 per­cent amid deeper cuts to the de­posit rate. At the same time, he's not con­vinced ad­di­tional BOJ eas­ing can rein­vig­o­rate the re­cov­ery. "It's dif­fi­cult to imag­ine more ef­fec­tive mone­tary pol­icy than what's al­ready in place," he said. "Un­less the gov­ern­ment takes dras­tic ac­tion, mone­tary stim­u­lus will have to con­tinue in­def­i­nitely."

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