Japanese Prime Minister Naoto Kan’s plan to plug a budget gap with record debt sales this year will get help from banks needing to park deposits that are outstripping loans by the widest margin on record.
Customer deposits at banks exceeded outstanding lending by 151 trillion yen ($1.8 trillion) at the end of November, up 37 percent from two years ago and equivalent to a third of the economy, according to Bank of Japan data. The Ministry of Finance plans to sell 144.9 trillion yen of government bonds in the year starting April 1, 600 billion yen more than the initial plan for fiscal 2010.
“As banks can’t reject deposits, you may expect banks to keep using extra money to buy government bonds,” said Akio Kato, Tokyo-based team leader for Japanese debt at Kokusai Asset Management Co., which runs the $35 billion Global Sovereign Open fund, Asia’s biggest. “Companies aren’t taking out loans and individuals are shunning debt, so it’s the government that ends up borrowing. Otherwise, economic growth may turn negative.”
Banks in developed nations increased government bond holdings since credit markets froze in 2008 while companies have resisted taking on debt. The Bank of England said last month that lenders have generated “substantial” interest income by borrowing at low short-term rates and buying longer-term bonds. As of December, U.S. commercial banks were on pace to buy the most Treasury and agency debt in any year since the Federal Reserve began tracking the data in 1950.
Yield Forecast
In Japan, domestic banks were the largest holder of government bonds for an eighth consecutive quarter as of Sept. 30, with 38.3 percent of the total, according to Mizuho Securities Co. That compares with 2 percent in the U.S., based on Treasury data.
Interest income at Japan’s six major banks fell 7.3 percent in the fiscal first half from a year earlier, while gains from bonds soared 354 percent, according to estimates from UBS AG. While the stagnant loans market undermines the central bank’s efforts to boost the economy through easing policies, the steady demand for government debt is helping to push down the nation’s borrowing costs.
Japanese 10-year yields are the lowest among 32 bond markets tracked by Bloomberg data, and will end 2011 at 1.23 percent, according to a weighted forecast of economists surveyed by Bloomberg News, from 1.11 percent last week. The rate fell to 0.82 percent on Oct. 6, the lowest since July 2003.
Consumer Prices
Japan’s prolonged deflation, a general drop in prices, has supported demand for the fixed payments from bonds. Consumer prices excluding fresh food fell in November for a 21st consecutive month, the statistics bureau said on Dec. 28. Monthly wages in the country decreased 0.2 percent from a year earlier to an average 277,585 yen in November, another government report showed.
Japan’s nominal gross domestic product, which doesn’t account for price changes, is at about the same level it was in 1991 when the nation’s property and asset bubble burst. Since 2000, deposits have exceeded loans every year at Japanese banks, while their government debt holdings more than doubled to a record 143.2 trillion yen by September, central bank data show.
As the yen’s rise to a 15-year high against the dollar threatened Japan’s economic recovery, BOJ Governor Masaaki Shirakawa and his board on Oct. 5 cut the key overnight lending rate to a range between zero and 0.1 percent. It also created a 5 trillion yen fund to buy stocks and other assets, which added to a 30 trillion-yen lending program.
‘Sustainable Increase’
“Prices won’t go up steadily without a sustainable increase in wages,” said Takeshi Minami, chief economist at Norinchukin Research Institute Co. in Tokyo. “The BOJ may extend existing measures by increasing the 5 trillion fund. If they opt for more aggressive action, they could lower the overnight rate closer to zero.”
The BOJ, which has said it will keep interest rates near zero until inflation reaches about 1 percent, expects a 0.1 percent increase in prices next fiscal year. Inflation-linked bonds tell a different story, signaling an annual 0.65 percent drop in prices in the next five years, the biggest price decline projected for Group of Seven nations, based on the difference in yields from straight government debt. The comparable rate shows an increase of 1.7 percent in the U.S.
Commercial Paper
Benchmark three-month commercial paper rates for businesses with the lowest a2 debt ranking were at 0.33 percent, according to prices from Tokyo Tanshi Co. Japan’s currency reached a 15- year high of 80.22 to the dollar on Nov. 1 and has advanced 13 percent advance over the past year.
The yen weakened to 82.10 per U.S. dollar as of 2:19 p.m. in Tokyo, from 81.12 on Dec. 31. The yield on the benchmark 10- year bond added five basis points to 1.16 percent. A stronger yen helps make imported goods cheaper and deepens deflation.
“When year-end economic numbers come out between January and March, we’ll recognize how bad economies are in the U.S. and Japan, which may boost speculation about additional monetary easing and drive down 10-year yields below 1 percent,” said Tokuyoshi Takano, a financial-derivatives manager in Tokyo at Mitsui Sumitomo Insurance Co.
Japan’s primary deficit next year will narrow to 22.7 trillion yen from 23.7 trillion yen, the Finance Ministry said on Dec. 24, equivalent to about 4.7 percent of the economy.
The yield advantage of 10-year U.S. debt over Japan’s widened to 2.34 percentage points on Dec. 28, the most since May 3. The premium was 2.4 percent for U.K. debt, the most since July.
Five-year credit-default swaps on Japanese government bonds were 71.47 basis points on Jan. 3, reflecting $71,470 to protect $10 million of face value, compared with 41.50 basis points on U.S. debt, 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.
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