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Abe Aids Bernanke as Japan Seen Buying Foreign Debt

By Wes Goodman and Daniel Kruger
January 14, 2013 1:37 PM EST 16 Comments
Shinzo Abe, Japan's prime minister, speaks during a news conference in Tokyo on Jan. 11, 2013. Abe’s Liberal Democratic Party has proposed establishing a fund run by the Bank of Japan, the Ministry of Finance and private investors to buy foreign bonds.
Photographer: Haruyoshi Yamaguchi/Bloomberg
Shinzo Abe, Japan's prime minister, speaks during a news conference in Tokyo on Jan. 11, 2013. Abe’s Liberal Democratic Party has proposed establishing a fund run by the Bank of Japan, the Ministry of Finance and private investors to buy foreign bonds.

Shinzo Abe is set to become the best friend of investors in Treasuries as Japan’s prime minister buys U.S. government bonds to weaken the yen and boost his nation’s slowing economy.

Abe’s Liberal Democratic Party pledged to consider a fund to buy foreign securities that may amount to 50 trillion yen ($558 billion) according to Nomura Securities Co. and Kazumasa Iwata, a former Bank of Japan deputy governor. JPMorgan Securities Japan Co. says the total may be double that. The purchases would further weaken a currency that has depreciated 12 percent in four months as the nation suffers through its third recession since 2008.

The support would help Federal Reserve Chairman Ben S. Bernanke damp yields after the worst start to a year since 2009, according to the Bank of America Merrill Lynch U.S. Treasury Index. Government bonds lost 0.5 percent as improving economic growth in the U.S., Europe and China curbed demand for the relative safety of government debt even with the Fed buying $45 billion in bonds a month.

“I can’t imagine the U.S. would be disappointed in Japan buying Treasuries,” Jack McIntyre, a fund manager who oversees $34 billion in global debt at Brandywine Global Investment Management in Philadelphia, said in a Jan. 8 telephone interview. “The Fed’s been doing all the heavy lifting.”

Bond Yields

Ten-year note yields fell one basis point, or 0.01 percentage point, to 1.86 percent at 1:34 p.m. New York time. The yield touched 1.97 percent on Jan. 4, the highest level since April. This year, U.S. debt maturing in 10 years or longer ranked 125 out of 144 indexes tracked by Bloomberg and the European Federation of Financial Analysts Societies.

The average Treasury 10-year note yield in 2012 was the lowest since at least World War II at 1.79 percent, compared with the 20-year mean of 4.73 percent. The average 10-year yield for Japan’s debt in 2012 was 0.85 percent, and was 1.85 percent during the past 20 years.

Strategists are already paring back bearish forecasts for U.S. debt. The 10-year Treasury yield will rise to 2.27 percent by year end, according to the median prediction of economists in a Bloomberg survey. In July, the estimate was 2.7 percent.

Hiromasa Nakamura, a senior investor for Tokyo-based Mizuho Asset Management Co., which oversees the equivalent of $38 billion, is more bullish. Ten-year Treasury yields will fall to a record low of 1 percent by year-end as Japan ramps up purchases, while the yen falls to 90 per dollar, he said in an interview on Jan. 11. Japan’s buying “will be one of the positive factors in the market.”

Fund Details

Abe said yesterday he wants someone “who can push through bold monetary policy” as the next governor of the Bank of Japan when Masaaki Shirakawa steps down in April. He has demanded the central bank double its inflation target to 2 percent and engage in unlimited easing till the goal is met.

Abe’s LDP, which swept to power in elections last month, has proposed establishing a fund run by the Bank of Japan, the Ministry of Finance and private investors to buy foreign bonds. He announced Jan. 11 a 10.3 trillion yen stimulus plan including about 3.8 trillion yen for disaster prevention and reconstruction, aimed at boosting gross domestic product by about 2 percentage points and creating about 600,000 jobs.

‘Bazooka Strategy’

The election handed the LDP a political mandate to follow through on its bond-purchase plan, George Goncalves, the head of interest-rate strategy at Nomura Securities International, one of 21 primary dealers that trade with the Fed, said in a Jan. 8 telephone interview from New York. “It’s a quantum leap from doing central bank easing in local markets to foreign markets.”

Details of the bond fund weren’t announced. It might be targeted at a variety of assets including Treasuries, though the whole amount may not even be deployed, according to Yunosuke Ikeda, the head of foreign-exchange strategy at Nomura in Tokyo.

“It’s the bazooka strategy,” Tokyo-based Ikeda said in a telephone interview on Jan. 10. “In order to have an impact on the dollar-yen market, the size needs to be very big.”

The yen may weaken to about 95 per dollar, Iwata, the president of the Japan Center for Economic Research, said at a forum in Tokyo on Jan. 11. The currency traded at 89.23 against its U.S. counterpart, having earlier fallen to 89.67, a level not seen since June 2010.

Buying Treasuries

In an October report, Iwata said that a 50 trillion yen fund would enable the BOJ to purchase foreign bonds to rein in the yen.

The fund could be twice that size or more as “there’s no upper limit,” said Masaaki Kanno, the chief Japan economist for JPMorgan and a former BOJ official. Abe can hold off on unveiling a large plan now until the next time the currency starts to appreciate, Kanno said by telephone Jan. 11.

Whatever the foreign bond fund’s amount, more than half will probably be funneled into Treasuries because they are the most easily-traded securities, Yoshiyuki Suzuki, the head of fixed-income in Tokyo at Fukoku Mutual Life Insurance Co., which has about $64.8 billion in assets, said on Jan. 8.

Tradable Treasury debt amounted to $11 trillion at the end of 2012, with weekly trading volume in the securities among 21 primary dealers averaging $521.4 billion, Fed data show.

Japanese Finance Minister Taro Aso said last week that his nation will buy bonds issued by the European Stability Mechanism to weaken the yen. The nation hasn’t decided on the amount, he said.

Yen ‘Myth’

Support for a new foreign-bond fund isn’t universal.

“I personally think it won’t happen,” said Naruki Nakamura, head of fixed income at BNP Paribas Investment Partners Japan in Tokyo, which has the equivalent of $8.7 billion in assets. “There’s no need to boost yen weakness. It’s a myth. I’m not sure the new administration wants unlimited inflation,” he said in a telephone interview Jan. 4.

Working against Abe’s plan is the decade-long pattern of the yen strengthening alongside U.S. debt. Moves in the 10-year Treasury note and the yen were correlated 60 percent of the time in 2012 on a weekly basis, reflecting their roles as havens from risk. Since the start of the financial crisis in August 2007, the yen appreciated 33 percent against the dollar, while yields on 10-year U.S. government debt fell to 1.87 percent from 4.74 percent.

Good Investments

Japan bought $76.9 billion of Treasuries in September 2011 and $59.9 billion in November 2011, its two largest monthly purchases. The 10-year U.S. note yield plunged 0.31 percentage point to 1.92 percent in September 2011 as Europe’s sovereign debt crisis worsened, and in November 2011 dropped 0.05 percentage point to 2.07 percent.

These turned out to be good investments. Treasuries returned 2.1 percent in 2012, or 15 percent after accounting for the dollar’s gain against yen, according to EFFAS index data compiled by Bloomberg. Japanese government bonds gained 1.8 percent, with only Swedish government securities returning less among 26 sovereign debt markets tracked by the gauges.

Treasury yields and the value of the yen last fell in tandem between January 2000 and October 2001, as U.S. stock prices declined 21 percent from then-record highs and as the Fed lowered borrowing costs to address a recession. The currency depreciated to 122 per dollar from 103 as 10-year yields slid to 4.23 percent from 6.44 percent.

Timing Right

For Bernanke, the timing couldn’t be better. Yields have risen 49 basis points from the record low of 1.379 percent July 25 with a pickup in economic growth curtailing demand. U.S. GDP grew at a 3.1 percent annual rate in the third quarter, up from 2.7 percent in the previous three months, the Commerce Department reported Dec. 20.

With the economy improving “Treasuries are susceptible to higher yields” over the next 6 to 12 months, Gary Pollack, who oversees $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York, said in a Jan. 10 telephone interview. “The market will start pricing in that the Fed stops buying Treasuries as part of quantitative easing. Without the Fed you’d see higher yields.”

European Central Bank President Mario Draghi said last week the euro-area economy will slowly return to health in 2013 as the region’s bond markets stabilize after three years of turmoil. Chinese government data showed exports increased 14.1 percent in December from a year earlier, the most since May.

Europe, China

Japan raised its holdings of U.S. debt in 2012 by 7.2 percent to $1.13 trillion as of October and is on pace to again become the largest U.S. creditor since slipping to second place in September 2008. China owns $1.16 trillion. The Treasury Department’s next report on foreign ownership of U.S. securities, covering November, is due Jan. 16.

Overseas investors help reduce U.S. borrowing costs by absorbing about half of the $11 trillion of publicly traded debt. Foreign buyers benefit as the purchases help to weaken their currencies, making their exports cheaper than American goods.

The yen slid 11 percent in 2012, the most in seven years. It is still about 13 percent stronger than its 10-year average of 101.15. Domestic manufacturers want the currency to trade between 90 and 100, Hiroshi Tomono, president of Nippon Steel & Sumitomo Metal Corp. said Jan. 7 in Tokyo.

Japan has been battling deflation for more than a decade, with consumer prices falling 0.1 percent each month on average over the past 10 years, causing shoppers to delay purchases. The nation’s economy contracted in the second and third quarters of 2012.

Purchasing Treasuries would “have the double benefit of allowing them to drive down the value of the yen and also better control any possible increase in yields of Japanese government bonds,” Brian Jacobsen, the chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin, said Jan. 9 at Bloomberg’s headquarters in New York.

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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