Yields on Euroyen futures doubled in the past two months & the rate for overnight loans in a range from zero to 0.1 at least

Yields on Euroyen futures doubled in the past two months, indicating the Bank of Japan will keep interest rates near zero until at least June 2012.

Euroyen contracts for delivery in June 2012 gave up 0.53 percent on Dec. 15, up from 0.27 percent in October, showing investors expect the Bank of Japan governor Masaaki Shirakawa, be maintained rate for overnight loans in a range from zero to 0.1 at least until then.

Money market rates show investors are still pessimistic about the economy as the government tries to end a decade of deflation. In the U.S., the only major economy where costs other reference loans are close to zero, the futures show an increase in the expectations of the Federal Reserve will raise its target rate for overnight loans between banks a day November.

"We can not expect a BOJ rate increase anytime in the foreseeable future," said Seiji Adachi, senior economist at Deutsche Securities Inc. in Tokyo. "The Bank of Japan seems to have no serious commitment to take risks, buying assets aggressive enough to spur inflation."

While Japan's industrial production fell in October by the most since February 2009, export growth slowed down, U.S. manufacturing increased more than four months in November. Chicago Mercantile Exchange futures show the possibility of a rate hike by the Fed in the current range of zero to 0.25 percent by late next year has risen to 46 percent from 39 percent a month ago.

Yen weaker

The last time the Fed began raising rates while the Bank of Japan remained stable in 2005. The yen slumped 13 percent against the dollar this year.

Japan's currency has already begun to weaken in anticipation of a widening gap in interest rates, falling to 83.98 per dollar on December 17 from its peak of 01 November 80.22.

Shirakawa unveiled a 5 trillion yen funds (59 billion) of asset purchases in October to try to end the low prices and stimulate demand. The measure has not done so far.

The gross domestic product will shrink 1.9 percent this quarter as spending Prime Minister Naoto Kan stimulus fades, the government-affiliated, said the Economic Planning Association on December 8, citing analysts' forecasts. Growth is expected to slow to 1.3 percent in 2011 from an estimated 4.3 percent this year.

Falling prices

Consumer prices excluding fresh food fell at an annual rate of 0.6 percent in October. The Bank of Japan, which has said it will keep rates near zero until inflation reaches 1 percent forecast an increase of 0.1 percent in the CPI next year.

Investors keep betting the central bank will not end a decade of deflation that the government says it is curbing economic growth. The difference between yields on Japanese government notes and five-year inflation-indexed debt, a gauge of expectations operator of consumer prices, has changed little in less than a percentage point to 0.70 in weeks to 17 December. The five-year average is less than 1.11 percentage points.

Constrained by the debt almost double the size of gross domestic product, the government has little room for Kan extend support to the economy, increasing pressure on the BOJ to keep rates low. Finance Minister Yoshihiko Noda said plans to reduce sales of bonds in the year from April 2011 44,300,000,000,000 yen this year.

credit-default swaps on five-year Japanese government bonds fell 0.7 basis points to 70.1 last week, CMA prices show in New York. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent of a government or a company fail to adhere to debt agreements.

No Move

Forecasts for deflation, and the rate of three-month Euroyen futures suggest the Bank of Japan does not move "at least until the end of 2012," said Toshiaki Terada, a researcher at Totana Research Co. in Tokyo.

The central bank kept its key rate in the current range until at least June 2012, fourteen of the 16 economists forecast the survey, with nine of them saying that a rate increase will take place in 2013 at soon. One said the bank could raise borrowing costs and in the second quarter of 2012.

Bank of Japan began buying exchange-traded funds and real estate investment funds last week in its asset purchase program. It has also started buying bonds of companies with a minimum rating of BBB.

The extra yield investors demand to hold such debt for five years the company rated BBB rather than similar maturity government notes fell to 104 basis points on Dec. 17, at least since March 2008, 121 5 October, when the Bank of Japan announced the program. The Tokyo interbank rate offered three months is down two basis points to 0.34 percent since then.

REIT ETF

The Tokyo Stock Exchange REIT index is up 11 percent over the same period, touching the highest level in over two years. The Nikkei 225 Exchange Traded Fund, which tracks the performance of benchmark stock index, rose 8 percent, while the Nikkei 225 has gained 8.2 percent.

Seiji Shiraishi, chief economist at HSBC Securities, said the bank's purchases of ETFs and REITs may be too small to put an end to deflation, which crimps revenue and profit margins, discouraging investment and employment.

"The purchases fall short of expectations stimulate growth and end deflation because the Japanese economy has been deeply rooted in deflation for over a decade," said Shiraishi. "You can not start a positive cycle and the U.S., where purchases are driving the Fed actions and stimulate consumer spending."