WSJ piece on Japan's bond market (and 7/15/03 U.S. bond mkt move).
July 16, 2003
Japan's Bond Market: Too Big?
Investors Worry That an End to Bull Market In Nation's Debt Will Bring a Hard Landing
By PHRED DVORAK and TODD ZAUN
Staff Reporters of THE WALL STREET JOURNAL
TOKYO -- For three tense weeks earlier this summer, Japan's gargantuan government-bond market cut loose.
Prices plunged and yields, which move in the opposite direction of the price, hit 1.4% on the government 10-year bond during one late-June session -- a massive move from the recent record low yield of 0.43%. The sharp move in Japanese bonds came amid a whiff of better economic news and talk that Japanese banks, the main holders of bonds, were selling.
Then, last week, the selling stopped. Yields started to sink again as investors decided Japan's slump was far from over, and one of the most dramatic and long-running bond rallies in modern history is back on track.
The herky-jerky trading action in Japan reflects a deep nervousness in major-economy bond markets around the globe. Bond prices rallied sharply as stock prices wilted, but yields reached such low levels in recent weeks that analysts began fretting about an inevitable global bond-market selloff. While bonds have stabilized a bit in Japan, U.S. Treasurys continued their severe skid. Tuesday, the yield on the 10-year bond rose to 3.933% -- a remarkable move from a yield of 3.11% reached on June 13.
With U.S. Treasurys continuing to wilt, bond investors worry that the respite in the Japanese bond market could be short-lived. Indeed, the recent wild ride poses an uncomfortable question: When the end of the ¥504 trillion ($4.27 trillion) bull market in Japanese government bonds does come -- and the Japanese economy, moribund as it is, has to recover some day -- is Japan set for a painfully hard landing?
"The market is just too big," says Naosumi Atoda, a professor of public finance who warns that unless steps are taken to stabilize things within the next few years, a big bond selloff could push Japan into deep financial or fiscal trouble.
The problem with Japan's bond market is that there is too much money, invested by too few companies, with too much at stake. In size, the market is already as big as the combined economies of Germany and France, the product of a decade trying to pump up the economy with government spending. And it has been growing at a double-digit pace for the past five years. Yields, too, have sunk to world-record lows: The 20-year-bond yield fell as low as 0.745% last month, while the benchmark 10-year dropped below a half percent from a peak of 8.3% in 1990.
What is more, with the depressed economy wilting demand for loans, banks have been moving increasing amounts of their cash into bonds. More than 60% of Japanese government bonds are in the hands of Japanese banks and other financial institutions, with 10% held by the top four banks alone. The potential for losses is dizzying: The nation's eight major banks together would lose about one trillion yen for each percentage point increase in 10-year bond yields, estimates Peter Morgan, an economist at HSBC in Tokyo. The little Bank of Iwate in northern Japan, amid an extreme drought in borrowers, now holds as much in bonds of various types as it does in loans.
That is bad enough. But many economists are even more concerned about what would happen when Japan's economy starts to recover, perhaps within the next five years. Right now, bond prices are supported by the view that Japan is mired in an economic rut, as well as an ultraeasy monetary stance by the Bank of Japan, which has promised to keep short-term interest rates at zero until Japan's debilitating deflation halts.
But if Japan's economy starts turning up and sentiment tips, all those banks could start unloading at once, leading to a selloff that would clobber Japan's already weak financial system. There are global implications too because Japanese banks also hold large amounts of foreign securities, such as U.S. Treasury bonds, which they could sell if they felt a pinch coming.
"When interest rates really do reverse and start to rise, there's a chance that this huge bond balance -- like a buried land mine -- could give people all sorts of expectations," central-bank governor Toshihiko Fukui told reporters last week. "It's a seed of worry." Tuesday, the Bank of Japan's nine-member policy board voted unanimously to leave monetary policy unchanged, signaling that it isn't worried about the recent surge in long-term interest rates.
In May, the Bank of Japan quietly decided to change its accounting system to protect itself from bond-market volatility. Japan's central bank already buys ¥1.2 trillion of government bonds a month as part of an effort to spur growth by pumping money into the economy. And it may have to buy more if interest rates shoot up too soon.
Japanese regulators are exploring ways to make the market more stable, primarily by adding more investors. Earlier this year, the Ministry of Finance began running print and television ads in which a popular Japanese actress encourages people to buy government bonds. For the fiscal year ending next March the government has budgeted ¥713 million to advertise bonds, 10 times more than three years ago. Along with the campaign, the government began selling bonds through banks, securities firms and post offices in denominations of as little as ¥10,000.
The ministry wants to sell more bonds to ordinary savers on the assumption that they are more likely to be long-term investors. Currently, individual investors own only about 2% of Japanese government bonds, while in the U.S. individuals hold a tenth of government debt. Japan's finance ministry is hoping its campaign will boost ordinary investors' share of the market in a few years to about the level in the U.S.
So far, bond buying by individuals isn't catching on as quickly as hoped. Individual investors bought ¥384 billion of 10-year bonds in the first bond sale that targeted them in March, but bought just ¥280 billion of bonds in the most recent auction on July 10.
Ministry officials are kicking around new ideas, hoping to make buying bonds as easy as purchasing postage stamps. The ministry is considering selling government bonds online and even through Japan's ubiquitous convenience stores.
"We want to make bonds familiar enough so that ordinary people feel they can just slip on a pair of clogs and run out to buy some," Finance Minister Masajuro Shiokawa told reporters in April. Public-finance professor Mr. Atoda doesn't think that's enough. He and members of a key government advisory board are lobbying to put investment professionals in charge of supervising the market, rather than "amateur" finance bureaucrats.
Treasurys
Treasurys suffered one of their biggest selloffs of the year on comments by Federal Reserve Chairman Alan Greenspan and news of stronger-than-forecast retail sales.
Speaking before the House Financial Services Committee, Mr. Greenspan said the Fed could opt for "substantial further easings" to spark growth, if needed. But analysts said the market focused more on remarks in which he seemed to rule out unconventional measures, such as Fed purchases of longer-dated Treasury securities, to spur growth.
Longer maturities suffered the biggest losses. The yield of the benchmark 10-year note, which moves inversely to its price, surged nearly 0.22 percentage point to 3.933% from 3.717% Monday.
At 4 p.m., the benchmark 10-year note's price was down 1 24/32 points, or $17.50 per $1,000 face value, at 97 16/32. The 30-year bond's price was down 2 23/32 points at 106 20/32 to yield 4.933%, up from 4.763% Monday.
Corporate and Junk Bonds
Dynegy Inc. became the latest highly speculative-rated company to unveil a major junk-bond refinancing.
The sale is expected to include $1.2 billion in second-priority senior-secured junk bonds and $300 million in convertibles and will take place late this month via Credit Suisse First Boston.
Proceeds will help refinance current debt, which totals about $9 billion.
--Jason Singer, Joy C. Shaw and Nicole Bullock contributed to this article.
Write to Phred Dvorak at phred.dvorak@wsj.com and Todd Zaun at todd.zaun@wsj.com
Updated July 16, 2003
Copyright © 2003 Dow Jones & Company, Inc. All Rights Reserved. |
