Finbarr Flynn Tokyo
PRIME Minister Shinzo Abe’s election victory will spur investors to buy riskier bonds by accelerating policies that have cut yields and boosted corporate profits.
Japanese company notes yielded 0.297 percent on average on Monday, less than half a basis point above a record low reached this month, Bank of America Merrill Lynch data show. With interest rates on 10-year government securities falling below 0.4 percent, credit analysts at SMBC Nikko Securities and Daiwa Securities Group said bond investors needed to consider expanding purchases of debt rated in the BBB area, the lowest credit level usually issued in Japan.
“Interest rates have fallen drastically due to Abenomics, making it a tough environment for bond buyers,” Takayuki Atake, a credit analyst in Tokyo at SMBC Nikko, said.
Higher yields
Abe’s coalition winning more than two-thirds of lower house seats in elections on Sunday should allow the acceleration of reflationary policies aimed at spurring growth and defeating more than a decade of deflation. Abe will probably increase pressure on companies enjoying record profits to pass on gains to workers, helping stimulate the prospects for the economy and risk assets, according to Nikko Asset Management.
“With this election and the increased stimulus from the Bank of Japan (BoJ), investors are going to be searching even more for bonds offering higher yields,” Toshiyasu Ohashi, the chief credit analyst at Daiwa Securities Group, said. “Investors have no choice but to take more credit risk.”
Ten-year Japanese government bond yields have fallen more than 37 basis points this year to 0.36 percent as the central bank buys unprecedented amounts of notes.
Average corporate bond yields dropped to 0.2957 percent on December 9, the least in data going back to 1996, Bank of America Merrill Lynch data show.
Investors are turning to riskier debt that offer higher yield premiums, buying subordinated bonds from Mizuho Financial and Rabobank last week that carry the risk of being written down in a crisis.
SoftBank’s sale of ¥400 billion (R39bn) in subordinated notes this month to individual investors pushed the sale of debt with BBB+ grades from Japan Credit Rating (JCR) Agency to a record ¥560bn compared with ¥165bn in 2013, according to data going back to 1999.
Sales of Samurai bonds by overseas issuers that offer investors higher spreads have climbed 59 percent this year to a record ¥2.68 trillion, compared with a 3.3 percent drop in domestic bond sales, according to data.
Abe faces upper house elections in about 18 months, and his government is “very likely to do everything it can for the economy to recover” in that time, according to a Bank of America report dated Monday. His victory was likely to result in progress on cutting corporate tax rates and wages might also rise, Masayuki Kichikawa and Setsuko Yamashita, Tokyo-based economists at the US bank, wrote in the note.
Salaries adjusted for inflation decreased 2.8 percent from a year earlier in October, the 16th consecutive month of declines, government data showed this month.
“The lack of significant wage increases as strongly requested by Mr Abe previously has been a major reason why Abenomics is not working very well for individuals,” John Vail, the chief global strategist at Nikko Asset Management, said in a note on Monday.
“This victory should help him convince companies to be more pro-active in this regard.”
Extra budget
The government is considering an extra budget of as much as ¥3 trillion to help the economy recover after an increase in the sales tax to 8 percent from 5 percent in April caused gross domestic product to shrink for two quarters, according to people involved in the discussions.
A confidence index for large manufacturers in Japan slid to 12 in December from 13 in September, according to the BoJ’s Tankan index released on Monday, lower than the median estimate of 13 in a survey of economists. The gauge is forecast to drop to 9 in March.
Japanese firms lowered their forecast for annual inflation to 1.4 percent in a year from 1.5 percent three months earlier, according to a BoJ survey released yesterday. – Bloomberg