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Japan Rates Likely to Remain Near Zero Until Mid-2012

Sunday, 19 Dec 2010 04:34 PM

Yields on euroyen futures doubled in the past two months, signaling the Bank of Japan will keep interest rates near zero until at least June 2012.

Euroyen contracts for delivery in June 2012 yielded a high of 0.53 percent on Dec. 15, up from 0.27 percent in October, showing investors anticipate BOJ Governor Masaaki Shirakawa will keep the overnight lending rate in a range of zero and 0.1 at least until then, according to data compiled by Bloomberg. All 16 economists in a Bloomberg survey say policy makers will leave rates unchanged at a two-day policy meeting ending tomorrow. The yield fell to 0.44 percent on Dec. 17.

Money-market rates show investors remain pessimistic about the economy as the government tries to end a decade of deflation. In the U.S., the only other major economy where benchmark borrowing costs are near zero, futures show increasing expectations the Federal Reserve will raise the target rate for overnight loans between banks by November.

“We just can’t anticipate a BOJ rate increase any time in the foreseeable future,” said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. “The Bank of Japan doesn’t appear to have any serious commitment to take risks, buying assets aggressively enough to spur inflation.”

While Japan’s industrial output fell in October by the most since February 2009 as export growth slowed, U.S. manufacturing jumped the most in four months in November. Chicago Mercantile Exchange futures show the chance of a Fed rate increase from the current range of zero to 0.25 percent by the end of next year has risen to 46 percent from 39 percent a month ago.

Weaker Yen

The last time the Fed started raising rates while the BOJ kept them steady was in 2005. The yen tumbled 13 percent against the dollar that year.

Japan’s currency has already started to weaken in anticipation of a widening interest rate gap, slipping to 83.98 per dollar on Dec. 17 from its Nov. 1 peak of 80.22.

Shirakawa unveiled a 5 trillion yen ($59 billion) asset- buying fund in October to try to end price declines and stimulate demand. The measure has done neither so far.

Gross domestic product will shrink 1.9 percent this quarter as Prime Minister Naoto Kan’s stimulus spending fades, the government-affiliated Economic Planning Association said Dec. 8, citing analysts’ forecasts. Growth is forecast to slow to 1.3 percent in 2011 from an estimated 4.3 percent this year, according to the median projections of 15 economists surveyed by Bloomberg News.

Falling Prices

Consumer prices excluding fresh food fell at an annual 0.6 percent pace in October. The BOJ, which has said it will keep rates near zero until inflation reaches 1 percent, forecasts a 0.1 percent increase in the CPI next year.

Investors maintained bets the central bank won’t end the decade-long deflation that the government says is curbing economic growth. The difference between yields on five-year Japanese government notes and inflation-linked debt, a gauge of trader expectations for consumer prices, was little changed at minus 0.70 percentage point in the week to Dec. 17. The five- year average is minus 1.11 percentage points.

Constrained by a debt burden almost double the size of gross domestic product, Kan’s government has little room to expand aid to the economy, increasing pressure on the BOJ to keep rates low. Finance Minister Yoshihiko Noda has said he plans to reduce bond sales in the year starting April 2011 from this year’s 44.3 trillion yen.

Five-year credit-default swaps on Japanese government bonds declined 0.7 basis point last week to 70.1, CMA prices in New York show. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.

No Move

Forecasts for deflation as well as the three-month euroyen futures rate indicate the BOJ won’t move “at least until late 2012,” said Toshiaki Terada, a researcher at Totan Research Co. in Tokyo.

The central bank will hold its key rate in the current range at least until June 2012, fourteen of the 16 economists in the survey forecast, with nine of them saying a rate increase will take place in 2013 at the earliest. One said the bank may raise borrowing costs as early as the second quarter of 2012.

Japan’s central bank started buying exchange-traded funds and real estate investment trusts last week in its asset- purchase program. It has also started to buy corporate bonds rated at least BBB.

The extra yield investors demand to hold such five-year BBB-rated company debt rather than government notes of similar maturity narrowed to 104 basis points on Dec. 17, the least since March 2008, from 121 on Oct. 5, when the BOJ announced the program, according to data compiled by Bloomberg. The three- month Tokyo interbank offered rate has fallen two basis points to 0.34 percent since then.

REIT, ETF

The Tokyo Stock Exchange REIT Index has advanced 11 percent during the same period, touching the highest level in more than two years. The Nikkei 225 Exchange-Traded Fund, which tracks the performance of the benchmark stock index, has risen 8 percent, while the Nikkei 225 has gained 8.2 percent.

Seiji Shiraishi, chief economist at HSBC Securities, said the bank’s purchases of ETFs and REITS may be too small to end deflation, which crimps revenue and profit margins, deterring investment and hiring.

“The purchases will fall short of spurring growth expectations and ending deflation because the Japanese economy has been deeply entrenched in deflation for more than a decade,” said Shiraishi. “It can’t ignite a positive cycle like in the U.S., where the Fed’s purchases are boosting stocks and stimulating consumer spending.”

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Yields on euroyen futures doubled in the past two months, signaling the Bank of Japan will keep interest rates near zero until at least June 2012.Euroyen contracts for delivery in June 2012 yielded a high of 0.53 percent on Dec. 15, up from 0.27 percent in October, showing...
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Sunday, 19 Dec 2010 04:34 PM
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