The Japanese economy has been experiencing a prolonged slump for almost a decade, with the stock mar...
The Japanese economy has been experiencing a prolonged slump for almost a decade, with the stock market either falling or flattening during this period.
Bob Attridge, head of fixed interest at Old Mutual Asset Managers points out that yields are very low, with 10 year bonds offering 1.79% though, with inflation, real yields are higher at around 2.8%.
"Japanese government bonds are not very attractive, given the size of the fiscal deficit and the stock of government debt outstanding, at about 135% of GDP," he says. "In contrast, the Maastricht criteria for European countries' entry into the euro requires governments to get debt below 60% of GDP.
"The Japanese proportion of the global government bond index has been rising rapidly. Other countries, such as the US, UK and Ireland are buying back their bonds. Japan really is standing out."
Roger Lynch, fixed income dealer at Chase Fleming points out that there are two conflicting currents working in the government bond market: domestic investors continue to buy government bonds but at the same time issuance keeps on increasing.
Lynch notes that the supply of government bonds keeps increasing as the government introduces more fiscally stimulative packages. He says: "This is the latest in a string of such measures but the concern is that domestic investors will eventually find more attractive investments."
The bond market is mainly held by domestic investors and the fear is that should they stop or even slow down buying them, government bonds yields will rise, Lynch says.
According to Attridge, the market has been supported by personal savings accounts. He says: "In a crisis, with banks in danger of going bust, people became very wary of recession and did not want to invest in equity markets. They put their money into postal savings accounts which in turn loaned the money out by buying Japanese government bonds."
Attridge says this has supported the market but in the last year investors have found personal savings rates much less attractive. The support from personal savings accounts has been replaced by the banking sector at the moment, which has no one but the government to lend to.
Attridge says: "The market is on a knife edge. On the one hand the economy may recover and banks may be able to start lending and therefore put less into government bonds, where we would see prices falling and yields rising. On the other hand if fragile growth gives way to recession the fiscal deficit may escalate alarmingly and the resulting increase in the supply of government bonds could overwhelm buyers in the market."
Corporate bonds have not come under the same kind of selling pressure, Attridge says. However, spreads have widened a little and domestic credits may have come under more pressure.
The corporate bond market is also very domestically oriented. Lynch notes that many corporate bonds are not rated and those which are tend to trade expensively as investors are more comfortable with their own domestic credits. There is nothing to suggest that the corporate bond market will develop in the near future, he adds.
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