Japanese government bond auction fails
news.ft.com
Investor confidence in Japan suffered another blow on Friday after a Y1,800bn auction of 10-year Japanese government bonds was undersubscribed for the first time in its history.
Traders were unnerved by the unprecedented lack of demand, but chalked it up to a case of incredibly bad timing. Earlier this week, the Bank of Japan said it would buy shares directly from commercial banks in an effort to reduce their massive exposure to stock markets, a move which sent shock waves through the markets.
"It indicates the disarray that exists in the financial markets right now, in terms of the BoJ sending one set of signals and the government not yet being fully coordinated and delivering a clear set of other signals of what they're going to do, if anything," said John Richards, strategist at Barclays Capital in Tokyo.
Junichiro Koizumi, Japan's prime minister, said on Friday the government would unveil measures in October to speed up the disposal of banks' bad loans.
But investors were sceptical regarding the resolve of the government to take definitive action to curb deflation and said the failed auction raised questions regarding its abilities to raise future funds.
The bid volume for the auction was Y1,185bn, well short of the Y1,800bn on offer. It was the first undersubscribed issue since 1989, when Japan began competitive price auctions for 10-year JGBs.
Thanks to a finance ministry safety net, however, a syndicate of financial institutions is expected to buy the undersubscribed portion of the auction of about Y165bn.
Masaru Hayami, governor of the BoJ, was unconcerned. "I am not that worried. I believe investors' appetite for JGBs is unchanged," said Mr Hayami. He added that 10-year JGBs were in a correction phase and that some market instability was inevitable.
But investors thought otherwise, and the auction's failure sent the JGB market reeling. The yield on the benchmark 10-year JGB rose 12.5 basis points to near two-month highs and the key 10-year JGB futures contract fell more than a point to 139.04 in intraday trade.
The yen also plunged after the auction, falling to three-year lows against the euro and slipping sharply against the dollar. The euro rose to Y121.2 against the yen while the dollar reached a high of Y123.39 in European trade.
"If auctions are consistently uncovered it undermines confidence in the system," said Mr Richards. "The borrower will not able to pay its bills or rollover its existing debts - that also applies to the MoF, in this case, which is why [the undersubscribed auction] was so embarrassing."
Thursday's auction was eerily reminiscent of a best-selling novel in Japan published nearly two years ago, called Nihon Kokusai, which translates as Japanese Government Bonds.
The book, which was much discussed on talk shows and in the media after its release, told the story of a group of bond traders who deliberately created a financial crisis by boycotting a Y1,400bn auction of 10-year JGBs. By boycotting the auction, the traders were aiming to force the Japanese government into making much-needed reforms.
On Friday, Merrill Lynch bond strategist Masuhihsa Kobayashi said: "It seems like that fiction is becoming a reality." |
