Disappearing Yield Gap Challenges Azumi Yen Pledge: Japan Credit - BusinessWeek

September 13, 2011, 1:08 AM EDT By Monami Yui, Hiroko Komiya and Kazumi Miura

Sept. 13 (Bloomberg) -- Finance Minister Jun Azumi’s pledge to take “bold actions” on the yen may be put to the test after a rally in overseas bonds reduced their yield advantage over Japanese debt.

Yields on two-year U.S. securities fell to a 19-year low relative to similar-maturity Japanese notes, a gap that has a “relatively high” correlation with the dollar-yen rate, according to Bank of Japan Governor Masaaki Shirakawa. The spread between Japanese and German debt is the narrowest since at least 1990, as the euro plunged to the lowest level in a decade against the yen.

Gains in Japanese bonds have been outpaced by those in the U.S. and Germany amid speculation Greece will default and the Federal Reserve will signal plans to buy longer-dated debt at a meeting starting Sept. 20. Investor demand for a refuge has intensified since last month, when Japan’s biggest currency intervention in seven years failed to stop the yen from appreciating to a postwar record.

“It’s hard to draw a picture of how the yen could weaken unless international interest-rate spreads widen,” said Tomoko Fujii, a senior foreign-exchange strategist at Bank of America Merrill Lynch in Tokyo. “It’s also the fact that intervention may not be enough to change the trend.”

Azumi ended his first Group of Seven meeting this past weekend, saying he “gained an understanding” with his counterparts on a pledge to stem the advance in his nation’s currency.

‘Bold Actions’

“We will continue to closely monitor developments and we will take bold actions, especially against speculative trading,” Azumi said after G-7 finance chiefs met in Marseille, France. “No one was opposed to my explanation.”

The spread between two-year Japanese and Treasury yields shrank to 2.78 basis points on Sept. 9, the least since January 1992, when the difference reached minus 23 basis points. The gap was at 5.8 basis points today, compared with the 11 basis-point level on Aug. 4 when Japan intervened to weaken its currency for the third time in the past 12 months. It was above 60 basis points as recently as April.

The yield spread between Germany and Japan’s two-year notes shrank to 25 basis points Sept. 9, the narrowest in Bloomberg data going back to 1990, and down from 171 in May.

Damage to Exporters

Japanese data last week showed that gross domestic product contracted in the second quarter by more than the government estimated, highlighting the yen’s threat to an economy that’s still reeling from the effects of a record earthquake in March. A stronger currency reduces the value of overseas earnings at exporters when repatriated.

Shares of Toyota Motor Corp., the world’s biggest carmaker, have lost 18 percent this year compared with a 17 percent plunge in the benchmark Nikkei 225 Stock Average.

The yen’s gains cut Toyota’s first-quarter operating profit by 50 billion yen ($649 million), the company said last month. Every 1 yen gain against the dollar cuts Toyota’s operating profit by 34 billion yen, according to the company’s full-year outlook.

The rising yen boosted Japan’s overseas capital investment compared with similar spending inside the country, with the ratio climbing to 6.5 times in the fourth quarter, the highest level since the three months ended in September 2008. It was 6.3 times in the January-March period.

‘Way Out’

Bank of Japan board members expressed concern that currency gains may spur companies to move factories abroad, according to minutes released yesterday of the central bank’s Aug. 4 meeting.

“Should domestic demand decrease while the strong yen proceeds, it’s natural for Japanese companies to look to find a way out in the overseas market,” said Satoru Ogasawara, vice president of economics research in Tokyo at Credit Suisse Group AG. “Facing a global economic slowdown, Japan needs fiscal and monetary policies to avoid excessive gains in its currency.”

Japan sold 4.51 trillion yen on Aug. 4 to weaken the currency, the nation’s biggest currency-market intervention on a monthly basis since 2004. The yen went on to reach a postwar high of 75.95 per dollar on Aug. 19. The yen advanced at least 0.7 percent against all 16 of its major peers in the past week, and increased 2.5 percent, the best performer among 10 developed nation-currencies tracked by Bloomberg Correlation-Weighted Currency Indexes.

Treasuries have surged, with 10-year yields reaching a record low of 1.877 percent, amid speculation the U.S. central bank will embark on more easing as early as this month.

Europe’s Debt Woes

Fed officials gather for a two-day meeting on Sept. 20 that was extended from the one day originally scheduled to “allow a fuller discussion” of the economy and the central bank’s possible policy response.

Japan’s 10-year yield was unchanged at 0.995 percent today, above its low on the year of 0.97 percent on Aug. 19.

Concern that European policy makers may fail to contain the region’s debt crisis also increased demand for the yen as a haven, driving the currency yesterday to the strongest since June 2001 against the 17-nation euro.

Officials in German Chancellor Angela Merkel’s government are debating how to shore up the nation’s banks in the event that Greece fails to meet the budget-cutting terms of its aid package and is unable to get a bailout-loan payment, three coalition officials said on Sept. 9. Lars Feld, a German government adviser, said on Bloomberg Television yesterday that the July decisions taken by European leaders “won’t suffice” to save Greece from default.

‘Downside Risks’

European Central Bank President Jean-Claude Trichet said last week “downside risks” to the region’s economy have intensified, sparking speculation the central bank may lower rates after boosting them two times this year to 1.5 percent.

Credit-default swaps insuring Japan’s sovereign debt for five years traded at 35.5 basis points more than Germany’s on Sept. 12, compared with this year’s high of 72.5 basis points on March 16, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Japan’s central bank kept its benchmark interest rate at a range of between zero and 0.1 percent on Sept. 6. It also left unchanged a 15 trillion-yen asset-purchase program that buys government bonds, corporate debt and stock funds.

“The BOJ will probably announce some measures to combat gains in yen at its meeting in October,” said Akito Fukunaga, chief rates strategist at the brokerage unit of Royal Bank of Scotland Plc in Tokyo. “Given there is little room for Japan’s short-term yield to fall, it’s impossible to widen the gaps against U.S. and German debt. A strong yen is inevitable in the long run.”

--Editors: Rocky Swift, Jonathan Annells.

To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Hiroko Komiya in Tokyo at hkomiya1@bloomberg.net; Kazumi Miura in Tokyo at kmiura1@bloomberg.net

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

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Moody's downgrades Japan's credit rating (AP)

By TOMOKO A. HOSAKA, Associated Press Tomoko A. Hosaka, Associated Press – Wed Aug 24, 2:56 am ET

TOKYO – Moody's downgraded Japan's credit rating, citing the country's weak growth prospects, massive government debt and constant political uncertainty.

The cut in Japan's government bond rating Wednesday to Aa3 from Aa2 puts the country three notches below Moody's top Aaa rating. Moody's Investors Service said the outlook for the rating is stable.

The rating cut comes ahead of another leadership shuffle in Japan. With his popularity sinking, Prime Minister Naoto Kan and his Cabinet are preparing to resign next week. That would set the stage for a leadership election within the ruling party and a new prime minister — Japan's sixth in four years.

Frequent administration changes have prevented Japan's government from adopting effective long-term economic and fiscal policies, Moody's said.

Kan has been criticized for lacking leadership after the March 11 earthquake and tsunami and subsequent nuclear crisis, and survivors of the disasters complain of slow relief and recovery efforts. Polls show his approval rating is below 20 percent.

The country's economic problems are compounded by the natural disaster and the ongoing nuclear crisis. Japan's ballooning debt is now twice the size of the country's gross domestic product.

"These developments further hamper the economy's ability to achieve a growth rate strong enough to steadily reduce the budget deficit," Moody's said.

The downgrade puts Moody's Japan rating in line with other major agencies. Both Standard & Poor's and Fitch rate Japan AA-, three notches below their top AAA ratings.

In May, Moody's warned it could downgrade Japan after the world's No. 3 economy slipped back into recession in the first quarter due to tumbling output and exports following the March 11 earthquake and tsunami.

Moody's has maintained its AAA rating on the United States while Standard & Poor's earlier this month took the unprecedented step of downgrading the U.S., blaming large deficits and political gridlock.

The decision compounded worries about the fiscal health of the world's biggest economies and unnerved already volatile financial markets.

Reaction to Japan's rating cut Wednesday was more muted. Analysts described the move as hardly a surprise, and bond markets remained calm.

Noriatsu Tanji, a fixed income strategist at Barclays Capital in Tokyo, said that unlike the U.S., a rating cut is not new territory for Japan. At one point in 2002, Moody's had dropped its assessment on Japan to as low as A2 before gradually upgrading it starting 2007.

"The latest downgrade puts Japan's rating at a level it has already seen before," he said in a research note.

Japanese government bonds have historically weathered rating cuts without sharp drops. Unlike the U.S., the vast majority of the Japan's public debt is owned domestically.

Even as it downgraded its view on Japan, Moody's highlighted the country's large economy and dependable domestic funding base that enables the government to fund itself "at a lower nominal cost than any other advanced economy."

"Furthermore, throughout the global financial crisis, in the months after the March earthquake, and in recent days with renewed turmoil in global markets, (Japanese government bonds) continue to demonstrate exceptionally strong safe-haven features," it said.

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Moody's cuts Japan's credit rating one notch - MarketWatch

By Chris Oliver, MarketWatch

HONG KONG (MarketWatch) — Global sovereign-debt concerns shifted to Japan’s shores Wednesday, as credit-rating firm Moody’s Investors Service downgraded the nation’s credit rating one notch, saying Tokyo needs to begin turning its debt situation around.

Asia Today: Moody's lowers Japan's credit rating, making the country the latest to be hit in the latest round of sovereign debt downgrades.

Moody’s lowered Japan’s rating to Aa3 from Aa2, citing large deficits and the buildup in government debt since the global recession in 2009.

Moody’s said in May it was putting Japan’s local and foreign- currency bond ratings on review for possible downgrade. At the time it cited long-term fiscal concerns as well as costs related to rebuilding efforts in the wake of the devastating earthquake and tsunami in March.

Moody’s noted that Japan’s debt situation looked bad when measured against international standards. The International Monetary Fund’s projections for 2011 put Japan’s debt-to-GDP ratio at 233%, while home-grown estimates put out by the Cabinet Office put the level at 181%.

“Several factors make it difficult for Japan to slow the growth of debt-to-GDP and thus drive this rating action,” Moody’s said.

It noted that neither the Cabinet Office nor the IMF sees progress toward the kind of policy that could contain or curb the debt burden over the next decade.

Despite the downgrade, Moody’s didn’t view a debt crisis as imminent. In fact, the ratings firm said the outlook was stable thanks largely to the “home bias” of Japanese investors, whose preference for Japanese government bonds meant bond yields were the lowest worldwide.

“We believe that this funding-cost advantage will be sustained by considerable institutional and structural strengths, which will prevail even with large budget deficits in 2011 and 2012,” Moody’s said.

Moody’s also criticized “frequent changes in administrations” as holding back development of the long-term policies needed.

In a coincidental development, Japanese Prime Minister Naoto Kan told his cabinet on Tuesday he plans to step down once lawmakers pass two key pieces of legislation, adding that he expected a new leader to be chosen on Aug. 30.

Moody’s also downgraded the Japanese banks it rates by an average of one notch.

Because banks are dependent upon government support in the event of a financial crisis, Moody’s had little choice in lowering their ratings to reflect it cut to the government’s credit rating.

The move sent Japanese banking shares lower in Tokyo stock trading on Wednesday, even though analysts said there was little significance owing to the stable outlook on the sector by Standard & Poor’s. Asia Markets

“We think this will have little impact on banks in terms of capital procurement costs and derivative and other transactions,” Citigroup said in a note.

Chris Oliver is MarketWatch's Asia bureau chief, based in Hong Kong.

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Futures Weak on Downgrade to Japan's Credit Rating - TheStreet.com

NEW YORK (TheStreet) -- U.S. stock futures were pointing to a weaker open Wednesday, stepping back after the previous session's rally as investors digested a downgrade to Japan's credit rating.

Futures for the Dow Jones Industrial Average were down by 94 points, or 109 points below fair value at 11,047. Futures for the S&P 500 were lower by 10 points, or 12 points below fair value, at 1149, and Nasdaq futures were off by 17 points, or 22 points below fair value.

Stocks surged Tuesday as better-than-expected global manufacturing data and speculation that the Fed may consider additional stimulus made investors more willing to take on risk.

Moody's Investors Service lowered the credit rating on Japan by one notch to Aa3 from Aa2 with a stable outlook. The ratings agency cited "large budget deficits and the build-up in Japanese government debt since the 2009 global recession."

A closely watched German business optimism index fell by more than economists expected in August. The index dropped to 108.7 from 112.9 in July. The market had only anticipated a dip to 111.

The FTSE in London was shedding 0.05% while the DAX in Frankfurt was adding 0.6%. Hong Kong's Hang Seng fell 2.1% and Japan's Nikkei lost 1%.

Economists are anticipating a 1.9% increase in July durable goods orders when the U.S. Census Bureau releases its report at 8:30 a.m. EDT. July's growth compares with a decline of 2.1% in June. Excluding transportation, orders are slated to dip 0.5% in July after ticking 0.1% higher in June, according to Briefing.com.

The Federal Housing Finance Agency will issue its housing price index for June at 10 a.m. In May, the index rose 0.4%.

Mining company BHP Billiton(BHP) reported an increase in annual profit of nearly 86% on record production, robust demand and higher prices on iron ore and copper, but warned that it is challenged by "tight labor and raw material markets." The stock was losing 1.3% to $79.85 ahead of Wednesday's opening bell.

Luxury homebuilder Toll Brothers(TOL) said earnings rose to $42.1 million, or 25 cents a share, which included a tax benefit of $38.2 million. Revenue slipped 13% to $394.3 million, missing estimates for sales of $403.6 million. The company also said it is too soon to assess how recent financial volatility has impacted housing markets.

At 10:30 a.m., the Energy Information Administration will give its weekly read on crude oil inventories. Analysts are projecting an increase of 2 million barrels in the week ended Aug. 19, according to a Platts survey.

Late Tuesday, the American Petroleum Institute said crude supplies lost 3.34 million barrels last week.

The October crude oil contract was losing 24 cents to trade at $85.20 a barrel. Elsewhere in commodity markets, gold for December delivery was shedding $11.90 to trade at $1,849.40 an ounce.

The benchmark 10-year Treasury was rising 7/32, diluting the yield to 2.132%. The dollar weakened against a basket of currencies, with the dollar index down by 0.1%.

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-- Written by Melinda Peer in New York.

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Linkers Dropping Most Since Lehman Show Deflation Deepening: Japan Credit - Bloomberg

Enlarge image Japan’s economy shrank at a 1.3 percent annual pace in the three months through June, the third-straight quarter of contraction, the Cabinet Office said on Aug. 15.

Japan’s economy shrank at a 1.3 percent annual pace in the three months through June, the third-straight quarter of contraction, the Cabinet Office said on Aug. 15. Photographer: Tomohiro Ohsumi/Bloomberg

Japan’s inflation-linked bonds are poised for a second monthly decline as the stronger yen exacerbates deflationary pressure on an economy still reeling from a record earthquake and a nuclear crisis.

Securities that reflect the outlook for consumer prices have handed investors a 0.02 percent loss in August, an index compiled by Bank of America Merrill Lynch shows, set for the first two-month slide since November 2008 in the aftermath of Lehman Brothers Holdings Inc.’s collapse. By comparison, U.S. inflation-linked debt has increased 6.4 percent since the end of June, while Germany’s has risen 3.3 percent.

The yen has recovered all losses against the dollar since Japan sold its currency on Aug. 4 for the third time in a year, re-approaching a postwar record set in March. A gauge of price trends known as the deflator fell in the second quarter by the most in more than a year, data showed this week, adding to evidence the stronger currency is deepening deflationary pressures that have gripped the country for more than a decade.

“I expect linkers to continue to slump,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Co., a unit of Norinchukin Bank, which has $920 billion in assets. “The yen’s appreciation counters rising prices on commodities and adds to downward pressure on the domestic economy by hurting exporters’ earnings, so it has negative influence over consumer prices.”

Japan’s economy shrank at a 1.3 percent annual pace in the three months through June, the third-straight quarter of contraction, the Cabinet Office said on Aug. 15. The deflator dropped 2.2 percent in the period from a year earlier, more than the median estimate of economists for a 1.7 percent decrease.

Deflation, or a general drop in prices, boosts the value of fixed payments from debt. The so-called breakeven rate, or the difference between yields on five-year notes and inflation- linked debt, fell to negative 0.48 percentage points on Aug. 9, the least since April 7, and was negative 0.44 percentage points today. That compared with a positive 1.70 percentage points in the U.S.

Japan’s statistics bureau will change the base year to 2010 from 2005 for the computation of consumer prices starting with July data that’s due for release Aug. 26.

Consumer prices excluding fresh food probably fell 0.3 percent last month, according to estimates by Norinchukin’s Minami.

“Expectations for inflation have barely risen in Japan,” said Hiroto Kuwahara, chief quantitative analyst at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo, one of the 25 primary dealers obliged to bid at government debt sales. “Accordingly, demand for linkers is stagnant.”

The yen traded as strong as 76.61 per dollar in Tokyo today, compared with as weak as 80.24 on Aug. 4 when Japan unilaterally sold its currency. It hit a record 76.25 on March 17 amid speculation Japanese companies would repatriate assets to cope with earthquake and tsunami-related damages. The yen returned to those levels this month as investors sought a refuge from debt crises in the U.S. and Europe.

Japan’s bonds climbed today, with 20-year yields sliding three basis points to 1.82 percent as of 3:09 p.m. in Tokyo. Ten-year bonds yielded 1.02 percent, or 0.82 percentage points more than the growth rate of consumer prices. The so-called real yield on similar-maturity U.S. debt was a negative 1.34 percentage points.

“There is a vicious cycle of the yen appreciation and deflation,” said Masafumi Yamamoto, chief currency strategist at Barclays Bank Plc in Tokyo. “A stronger yen definitely could create deflationary pressure. Higher Japanese real yields are supportive for the yen at the same time, which will likely strengthen to 75 per dollar over the next month.”

A re-emergence of deflation and the yen’s strength may prompt the Bank of Japan to ease policy further. The BOJ expanded an asset-purchase fund, which buys securities ranging from government bonds to corporate debt to stock funds, by 5 trillion yen ($65 billion) on Aug. 4 to total 15 trillion yen.

“Depending on foreign-exchange rates, the economic outlook and most of all consumer prices, pressure on the BOJ for additional easing will certainly increase,” said Shuji Tonouchi, a senior fixed-income strategist in Tokyo at Mitsubishi UFJ Morgan Stanley.

To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net

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

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