Japan Election Landslide Means Buy Nikkei, Sell JGBs (Update2)
By Theresa Barraclough
Aug. 31 (Bloomberg) -- Japanese bonds will decline while stocks rise after Japan’s opposition Democratic Party of Japan swept to power, said Yuuki Sakurai, chief executive officer of Fukoku Capital Management Inc.
The DPJ won at least 308 of 480 seats to secure a majority in Japan’s lower house, public broadcaster NHK projected. Stocks will rise on optimism DPJ policies to stimulate domestic demand will lift the economy, while financing for those measures will result in further bond issuance, sending prices down, Tokyo- based Sakurai said.
Ten-year government bond yields will probably rise to 1.7 percent by year-end, while the Nikkei 225 Stock Average will advance to as high as 12,000, according to the investor. Stocks and bonds were little changed today, while the yen strengthened.
“It’s a landslide victory for the DPJ and the equity market may remain excited for a couple of days or even a couple of weeks,” said Sakurai, who helps manage about 800 billion yen ($8.6 billion) in assets. Financing for the party’s spending plans “will have to come from government bonds,” he said.
The DPJ faces accelerating deflation and record unemployment as it seeks to craft an economic recovery in a nation that only last quarter emerged from its deepest postwar recession. Japan’s consumer prices fell at an unprecedented 2.2 percent in July from a year earlier, while the jobless rate climbed to 5.7 percent, the statistics bureau said Aug. 28.
Prime Minister Taro Aso’s Liberal Democratic Party lost about two-thirds of its 303 legislators in the chamber that chooses the premier. The LDP ruled Japan for all but 10 months since 1955.
Debt Issuance
The Nikkei 225 surged 25 percent through the remaining year after the last general election in 2005. Bonds fell for six straight weeks, the longest stretch in more than a year. A similar result may emerge as the DPJ carries out plans to boost consumption, according to investors and strategists.
Bond investors are concerned the new government will increase new issues to finance fiscal measures pledged by the DPJ, adding to public debt that is already almost double the size of Japan’s $4.9 trillion gross domestic product.
Debt maturing in more than 10 years handed investors a loss of 2.9 percent this year, according to indexes compiled by Merrill Lynch & Co. Ten-year yields increased were unchanged at 1.31 percent today.
Shares of companies that rely on domestic spending may benefit as the DPJ focuses on stimulating consumption. The Nikkei 225 rose as much as 2.2 percent today before losing 0.1 percent. The index has gained 20 percent this year, rebounding from last year’s record 42 percent plunge during the global financial crisis.
‘Stabilizing’ Politics
“Stocks will rise as foreign investors regard the stabilizing political situation as a positive,” said Hidenori Suezawa, Tokyo-based chief strategist at Daiwa Securities SMBC Co., a unit of Japan’s second-largest brokerage.
Japan’s economy, the world’s second largest, grew at an annual 3.7 percent pace last quarter, the first expansion in more than a year, as more than $2 trillion in stimulus plans worldwide helped revive trade.
Aso pledged 25 trillion yen in government spending to combat the recession. Economists expect growth will weaken in coming quarters once government cash injections are exhausted.
Japanese companies forecast the yen, which traded at 92.84 against the dollar today, may average 94.85 in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released July 1. The average of the 10 most recent analyst forecasts is for the yen to end the year at 97.3, and finish March at 99.4, according to data compiled by Bloomberg.
‘Good Strength’
The yen is likely to benefit from the DPJ’s pledge to give the Bank of Japan more autonomy, increasing the scope for the central bank to raise interest rates earlier.
“The yen is going to rise,” said Kazuaki Oh’e, a bond salesman in Tokyo at Canadian Imperial Bank of Commerce, the nation’s fifth-biggest bank. “You may think this fact would hurt Japanese exporters, but this economic expansion is mostly on the domestic side. So this stronger yen won’t hurt as much as before. It’s a good strength.”
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