Kuroda Killing Data Sensitivity Risks Yield Surge: Japan Credit

Jul 14, 2014 9:11 pm ET

July 15 (Bloomberg) -- Japanese bond prices are failing to reflect the tightest job market in 22 years, risking a surge in yields when the central bank tapers its unprecedented stimulus.

The world’s third-largest economy had 1.09 jobs available for each applicant in May, official data showed last month. The jump has yet to push up short-term interest rates, with the gap between the vacancy rate and the two-year Japanese government bond yield of 0.055 percent widening to a record, Bloomberg- compiled data show. Two-year Treasuries yielded 0.45 percent.

The traditional link between labor demand and bond prices has broken down as Bank of Japan Governor Haruhiko Kuroda’s record debt buying to spur 2 percent inflation made the central bank the biggest holder of JGBs. Goldman Sachs Group Inc. and Bank of America Merrill Lynch say interest rates could jump when the central bank starts to pare purchases.

The widening gap “symbolizes the peculiarity of the Japanese economy now,” said Naohiko Baba, Goldman Sachs’s chief Japan economist and a former BOJ official. “Even if the 2 percent target is achieved, the BOJ can’t terminate the current massive purchase, because doing so will cause yields to shoot up.”

Japan’s central bank will keep unchanged its monetary policy of buying about 7 trillion yen ($69 billion) of sovereign notes a month, at its two-day meeting ending today, according to all 34 economists surveyed by Bloomberg News.

Data Divergence

Employment figures and short-term yields began to show a clear divergence from the latter half of 2009, when the BOJ re- introduced quantitative easing during the global financial crisis, data compiled by Bloomberg show. The BOJ previously used money supply as a policy target from 2001 to 2006.

By contrast, the two figures moved largely in tandem in the 1990s. A decline in the job-to-applicant ratio to 0.62 in November 1995 from 1.44 in June 1991 coincided with a decrease in Japan’s two-year yield to 0.36 percent from 6.98 percent, data compiled by Bloomberg show. Yields then rebounded to 1.17 percent by June 1997 as the employment gauge climbed to 0.74.

Ten-year yields would be 1.1 to 1.2 percentage points higher now if the BOJ weren’t carrying out its purchases, according to Shogo Fujita, the chief Japan bond strategist at Bank of America Merrill Lynch in Tokyo.

“This gap keeps widening the more the BOJ buys JGBs,” said Fujita. “When the BOJ begins tapering, there is a possibility the market will try to amend the imbalance quickly.”

Falling Yields

Benchmark 10-year yields have fallen 20 basis points, or 0.2 percentage point, to 0.535 percent this year. The yen has risen 3.7 percent since Dec. 31 to 101.50 per dollar as of 5:15 p.m. in Tokyo yesterday, after sinking 18 percent in 2013.

Kuroda said last month he expects inflation to reach 2 percent around 2015. Core consumer prices excluding fresh food rose 3.4 percent from a year earlier in May, with an April sales-tax increase pushing up costs by about 2 percentage points, according to an estimate by the BOJ.

Economic data suggest that the improvement in Japan’s job market is uneven.

While the job-to-applicant gauge is rising, the increase is coming mostly from the construction and services industries, government data show. And the drop in country’s jobless rate to a 17-year low of 3.5 percent was driven mainly by an increase in non-full-time work, according to government data.

Maintain Stimulus

Economists predict the BOJ will maintain its stimulus policy at least until 2016 to ensure deflation is overcome.

In a survey of 33 analysts by Bloomberg News, no one predicted the BOJ will start tapering its stimulus before 2016. Six forecast a move that year, five expect it in 2017 and six predict action in 2018 or later, according to the poll. The rest said the timing of a reduction in stimulus is unforeseeable.

“In normal times, the BOJ may now be at a stage where it could start planning about a shift in monetary policy to avoid being behind the curve,” Baba of Goldman Sachs said. “But the BOJ isn’t loosening its grip on easing because of its 2 percent price target.”