Kuroda's retreat from bonds stymied by expectations for more BOJ stimulus

posted on October 3, 2015

With the economy weakening markedly, banks are flocking to longer-dated government debt on expectations the Bank of Japan will expand its stimulus program. That's creating fresh challenges for BOJ Gov. Haruhiko Kuroda, who's trying to get banks to buy fewer bonds and lend more.

Net purchases by city banks of the nation's sovereign debt maturing in 10 years or longer reached ¥1.16 trillion ($9.7 billion) in August, the highest in 11 months, data from the Japan Securities Dealers Association showed.

The ratio of bank loans to deposits was at 0.673 in August, near a record low touched in May, according to Bloomberg-compiled data based on the central bank's figures.

The BOJ's tankan survey on Thursday showed waning confidence among manufacturers, adding to speculation that decelerating growth at home and abroad will force the BOJ to boost stimulus when it meets at month's end. Bonds dated 30 years and longer have returned more than 35 times that for notes maturing in less than five years in the third quarter, Bank of America Merrill Lynch Index data show.

"Given yields have come down to considerably low levels, there is no choice but to tap longer-dated bonds for premiums," said Toru Suehiro, a senior economist at Mizuho Securities Co. in Tokyo. "Emerging speculation of an additional BOJ easing probably was behind the investment flows in August."

The benchmark 10-year JGB yield declined 10.5 basis points in the third quarter, while two-year yields inched up 1 basis point. The gap between two-year and 20-year yields narrowed to 109 basis points on Sept. 24, the least since April.

Bonds dated 30 years and longer returned 1.9 percent in the quarter ended Sept. 30, Bank of America Merrill Lynch Index data show. That compares with 1.6 percent for those with 20 years to 30 years maturity and 0.1 percent for notes due in less than five years.

The BOJ is nowhere near reaching its 2 percent inflation target, with consumer prices falling in August, even as it buys as much as 12 trillion yen of JGBs each month - over 90 percent of the notes issued to markets.

source by newsonjapan
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