Kuroda seen limiting '14 losses as record run ends

(c) 2013, Bloomberg News.

TOKYO — Bank of Japan Governor Haruhiko Kuroda has scope to increase unprecedented stimulus, limiting losses on the nation's government bonds in 2014 as global sovereigns slump, economists predict.

Ten-year Japanese government bond yields will rise to 0.87 percent by the end of next year after reaching a three-month high of 0.735 percent Monday, while the average for Group of Seven peers climbs 27 basis points during the period to 3.205 percent, the median forecasts of analysts surveyed by Bloomberg News show. Japan's benchmark bond would deliver a 0.4 percent loss to investors in that scenario and end 10 consecutive years of gains for the JGB market.

The BOJ, which has been buying about 70 percent of new debt sold to investors since April, has scope to expand purchases even more, according to 71 percent of economists polled by Bloomberg. Adding to stimulus may become necessary after April when Japan starts a two-stage doubling of the sales tax to 10 percent, an increase that will probably cause the economy to shrink in the second quarter, according to analyst forecasts.

"As long as the Bank of Japan keeps easing, it's hard to imagine yields rising much," said Satoshi Yamada, a manager of debt trading in Tokyo at Okasan Asset Management Co., which oversees the equivalent of $11 billion. "Ten-year yields are unlikely to rise above 1.1 percent next year."

The 10-year yield rose 3 basis points to 0.735 percent as of 2:57 p.m. in Tokyo, the highest since Sept. 11. It is still set for the lowest year-end close in data compiled by Bloomberg going back to 1985. The 20-year yield touched 1.595 percent, the highest since Sept. 20.

Japan's sovereign debt returned 2.2 percent through Dec. 27, extending a run of annual gains to a 10th year, the longest stretch in data that began in 1986, according to a Bank of America Merrill Lynch index. That compares with a 0.4 percent loss on global sovereigns.

Kuroda drove the benchmark yield to a record low of 0.315 percent on April 5, the day after he pledged to end 15 years of deflation by doubling monthly bond buying to more than 7 trillion yen ($66.4 billion).

"Deflation was not only a result of economic stagnation but also a cause that protracted economic stagnation," Kuroda told the Keidanren business lobby in Tokyo on Dec. 25. He said the central bank must work on managing expectations in order to beat the "vicious cycle" of falling prices.

The nation's consumer prices excluding fresh food rose 1.2 percent in November from a year ago, bringing the rate closer to the monetary authority's 2 percent target, government data showed Dec. 27. BOJ policy makers predict gains in core prices, stripped of the effects of the planned 5 percentage point sales- tax increase, will accelerate to 1.3 percent in fiscal 2014, and to 1.9 percent the following year.

It "may be difficult" to declare an end to deflation during 2014, and the timing will depend on factors such as overseas economic conditions, Japan's Deputy Economy Minister Yasutoshi Nishimura said in an interview on Dec. 27.

The yield gap between nominal paper and similar-maturity inflation notes signals a 1.08 percent annual increase in consumer prices over 10 years, according to the break-even rate.

"The BOJ would have to take some kind of initiative if it starts to look unlikely that its 2 percent inflation target in two years can be achieved," said Okasan's Yamada.

Policymakers see significant scope to boost bond purchases if necessary, according to people familiar with the discussions. More than half of the 37 economists in Bloomberg's survey see the BOJ adding to stimulus by June next year.

The BOJ estimates its current-account balance, the financial companies' deposit at the central bank, rose to a record 107 trillion yen Monday.

Takeshi Fujimaki, who once advised billionaire investor George Soros and currently holds a seat in Japan's upper house of parliament, said additional monetary easing may have the opposite of its intended effect, and trigger a bond selloff.

"If Mr. Kuroda does additional measures, maybe the market will think it's monetization," Fujimaki said in interview in Tokyo this month. "I'm very concerned about the JGB market's reaction — it's very dangerous."

The government plans to reduce annual bond sales for the first time in six years in the 12 months starting April 1 to 155.1 trillion yen, from a record 156.6 trillion yen in the initial plan for the current fiscal year, the finance ministry said last week. Japan has the world's biggest debt burden at more than twice the size of its economy.

The BOJ's record bond buying initially triggered a jump in bond market volatility, which declined after the central bank began meetings with investors and increased the frequency of purchase operations. Historical volatility dropped to a 10-month low of 1.381 percent on Dec. 24 on a 60-day basis, down from a five-year high of 3.975 percent on June 25.

The cost to protect Japan's government bonds against non- payment declined to 40 basis points on Dec. 27, the lowest since Sept. 2009.

The stimulus has also made the yen the worst performing Group of 10 currency versus the dollar for a second year, declining 18 percent to a five-year low of 105.41 per dollar, and helped drive a 51 percent rally in the Topix index as Japanese stocks beat every other developed market in 2013.

The challenge for policy makers will be sustaining the economy's momentum after the consumption tax increases. Economists see growth slowing to a 1.6 percent annualized pace in 2014, and 1.2 percent in 2015, from 1.8 percent this year.

"Looking at the year ahead, I can't find any factors that would significantly boost confidence in Japan's economy," said Toru Yamamoto, the chief strategist at Daiwa Securities Co., one of the 23 primary dealers obliged to bid at government auctions. "Ten-year yields may rise slightly, led by stock gains, but they are likely to be capped below 1 percent."

_ With assistance from Yumi Ikeda, Chikako Mogi and Takashi Hirokawa in Tokyo and Masaki Kondo in Singapore.

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