Bond Market Signals No end to deflation for eight years

The Bank of Japan predicts that an end to deflation in 2011 and 35 billion yen (417.8 billion U.S. dollars) in spending did little to change the thinking in the bond market, where investors see eight more years of falling prices.

Bonds designed to protect investors against inflation show that Japanese money managers expect prices to decline at an average rate of 0.6 percent over the next five years and 0.4 percent annually through 2018. Japan is the only country where bonds linked to price changes show entrenched deflation expectations.

"Japan does not go for any combination of aggressive recovery policy and therefore is likely to prolong Japan's deflation," said Tomoya Masanao, who oversees the funds in Japan for Newport Beach, California, Pacific Investment Management Co., which manages the world's biggest bond fund. The Bank of Japan's plan was "rather cosmetic," said Masanao into an e-mailed response to questions.

Prime Minister Naoto Kan has urged the Bank of Japan, Masaaki Shirakawa, to eliminate the deflation that has inhibited growth, enabling China to surpass its Asian rival briefly as the second largest economy in the world. The gross domestic product in Japan grew 15 percent during the 20 years until 2009, while the United States increased 158 percent and China increased 20 times.

During that period, prices of Japanese products, excluding fresh food rose 0.3 percent per year on average, while yields on benchmark government debt to 10 years averaged 2.4 percent. U.S. prices excluding food and fuel rose by 2.7 percent and the yield of 10-year Treasury averaged 5.53 percent.

20 months straight

The Japanese price indicator fell 0.6 percent from a year earlier in October, marking 20 consecutive months of falls. Deflation, a general decline in prices, increases the value of the fixed payments of debt and weak economic growth by dampening investment, spending and hiring.

the central bank's efforts to boost the economy, driven by a bottom in October of 5000 billion yen for the purchase of assets, decreased expectations of deflation, as measured by the gap between bond yields and inflation those not linked to changes in consumer prices. The call equilibrium rate of eight values that represent the expectations of traders in the annual deflation average fell 0.45 percent on 3 December to 1.32 percent in December 2009.

"Sentiment is changing"

The Bank of Japan is "fighting and working," said Hideo Shimomura, who helps oversee the equivalent of 59.4 billion U.S. dollars in Tokyo as investment fund manager at Mitsubishi UFJ Asset Management Co. "The mood is changing and people is increasingly optimistic about Japan out of deflation, although it will take a couple of years. "

the inflation-indexed debt has exceeded the government notes in the last six months. An investor who bought securities indexed to five years on June 10 posted a return of 2.9 percent, while a purchaser of similar maturity bonds lost 0.1 percent.

Some 150 lawmakers from the ruling Democratic Party of Japan, who call themselves the league to combat deflation, said last month the Bank of Japan should adopt an inflation target to eradicate the decline in prices and boost employment .

"Political pressure"

"What the Bank of Japan in the past has had little impact," said Akio Kato, leader of the team based in Tokyo for Japanese debt at Kokusai Asset Management Co., which manages the World 35 billion U.S. dollars of sovereign funds Open, the largest in Asia. "Investors are skeptical about anything on the Bank of Japan. It is a debate if they did their best to reach the current situation and took action only after succumbing to political pressure."

The Bank of Japan said on Oct. 28 that consumer prices in the nation, excluding fresh food will increase by 0.1 percent in the year starting in April.

Bank of Japan Governor Shirakawa and his board on October 5 reduced key lending rate overnight to "almost zero, and pledged to keep it there until you can predict the stability of prices, the bank believes that inflation up to 2 percent. In December 2009, he created a 10 trillion-yen loan was extended to 30 billion yen.

"Producing yen will not stimulate demand," said Shinichiro Furumoto, president of the ruling Democratic Party of Japan panel of tax policy and finance, in an interview on 26 November.

The higher yields

The yield on Japan's benchmark 10-year-old arrived at 1,235 percent on December 8, the highest since June, an increase of 40 basis points in a seven-year low in October. U.S. yields are increasing faster because the data indicate that economic growth is accelerating and the agreement of President Barack Obama to expand Bush's tax cuts, speculation was driving the U.S. will have to finance a larger deficit.

The additional yield of 10-year U.S. Treasuries offer debt of similar maturity Japanese government increased to 198 basis points, or 1.98 percentage point, the highest since July. The difference was 146 basis points on September 07.

The yen weakened to 84.31 per U.S. dollar December 9 to 30 November 83.69. Japan's currency hit a 15-year-80.22 per dollar on November 1 and has advanced 11 percent this year, the biggest gain among counterparts in the developed world.

A stronger yen dimming the profit outlook for exporters in Japan and may increase pressure for lower prices, making imports cheaper.

4 billion yen

The Ministry of Finance has issued ¥ 10,000,000,000,000 10 - year bonds indexed to inflation and has not sold any since August 2008. The amount of outstanding debt linked to inflation is about 4 trillion yen, according to Takashi Nishimura, an analyst in Tokyo at Mitsubishi UFJ Securities Co. Morgan Stanley

Demand for the securities "collapsed" after the bankruptcy of Lehman Brothers Holdings Inc. in September 2008 because of low liquidity, Nishimura said. The ministry has bought back the values as needed to avoid excess supply, improve the accuracy of the equilibrium rate as an indicator of expectations of deflation, he said.

Japanese public debt has given investors a loss of 1.7 percent since Oct. 5, when the Bank of Japan announced its plan to buy assets, according to an index compiled by the Bank of America Corp. ' s unit of Merrill Lynch. The Nikkei 225 Stock Average Index has advanced 6.5 percent in that time.

credit-default swaps on five-year Japanese government bonds fell a basis point to 70.6 on December 9, CMA prices show in New York. That compares with 71.1 for China. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a government or a company fails to meet debt agreements.

Extra Performance

The extra yield investors demand to own debt denominated in yen of foreign borrowing rather than the Japanese government fell two basis points to 120 points, according to indexes compiled by Nomura Securities Co.

commercial rates to three months' paper companies with lower A2 rating fell to an average of 0.33 percent, up from 0.4 percent on Oct. 4, according to Tokyo Tanshi Co. The rate was reduced after that the central bank said Oct. 5 it would consider buying commercial paper and other assets through funds 5 trillion yen.

Prices are subject to fall in developed countries like Japan, as the growth caps and lowers aggregate demand, said Daisuke Uno, chief strategist at Tokyo-based Sumitomo Mitsui Banking Corp., the second largest lender in Japan deposits of $ 850 million.

"The question is first if deflation can be defeated," the One "I do not think it can be."