Japan Notes Complete Weekly Gain as Senate Rejects Auto Bailout

By Theresa Barraclough

Dec. 13 (Bloomberg) -- Japan’s five-year notes completed a weekly gain as stocks tumbled after the U.S. Senate rejected a $14 billion bailout plan for the nation’s automakers.

The securities yesterday rose the most in six weeks as Toyota Motor Corp., which gets more than half its profit in North America, led losses in the Nikkei 225 Stock Average. The dollar yesterday slumped below 90 yen for the first time in 13 years. Bonds also advanced after the Nikkei newspaper yesterday said the Bank of Japan may next week provide its worst assessment of the economy since May 2002.

“With the anxiety of the Big Three and the appreciation of yen to these levels, there is no alternative to buying bonds,” said Jun Fukashiro, senior fund manager at Toyota Asset Management Co. in Tokyo.

The yield on the 0.9 percent bond due December 2013 fell 3.5 basis points this week to 0.845 percent in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker.

Ten-year yields declined two basis points, or 0.02 percentage point, yesterday to 1.39 percent. Yields are up two basis points on the week.

Ten-year bond futures for March delivery jumped 0.32 this week to 139.42 at the Tokyo Stock Exchange. The dollar fell as low as 88.53 yen, the weakest since August 1995, and the Nikkei 225 Stock Average slid 5.6 percent yesterday.

Japan’s bonds typically move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.78 with the Nikkei 225 in the past two weeks, according to Bloomberg data. A value of 1 would mean the two moved in lockstep.

‘Over With’

“It’s over with,” Majority Leader Harry Reid said late Dec. 11 on the Senate floor in Washington, referring to the automaker bailout. “I dread looking at Wall Street tomorrow.” The Senate thwarted the bailout plan when a bid to cut off debate on the bill fell short of the required 60 votes.

“The U.S. bailout plan is affecting the stock market,” boosting bonds, said Takashi Nishimura, an analyst at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank by assets, in Tokyo. “The downgrading of the economic assessment is a step forward toward another rate cut.”

The Bank of Japan may change its assessment of economic activity to “worsening,” from “increasingly sluggish,” at its two-day policy meeting ending Dec. 19, the Nikkei newspaper said yesterday, without citing anyone. BOJ Deputy Governor Hirohide Yamaguchi said on Dec. 11 policy makers need to be aware that downside risks are increasing and the bank needs to consider various options when setting policy.

Tankan Index

The Tankan index of confidence among large manufacturers will slide to minus 23 in December from minus 3, according to the median estimate of economists surveyed by Bloomberg before the Dec. 15 report. The decline would be the biggest since 1975, when it fell 21 points in the wake of the first oil shock. A negative number means pessimists outnumber optimists.

“Next week’s Tankan is bond-buying material,” said Akihiko Inoue, an analyst in Tokyo at Mizuho Investors Securities Co., one of the 24 primary dealers that are required to bid at government debt sales.

There was a 36 percent chance yesterday the BOJ will cut borrowing costs by the end of March, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps. The key overnight lending rate is 0.3 percent.

Demand for bonds this week was limited on concern the government will sell additional debt to cover a shortfall in tax revenue. Issuance for the year ending March 31 will rise from the originally planned 105.1 trillion yen ($1.17 trillion), two finance ministry officials said Dec. 10.

Lower Rates

The finance ministry will also boost debt sales to investors including banks and life-insurance companies in the year starting April 1, according to a Bloomberg survey of primary dealers. Bond offerings to private investors will rise to 112.8 trillion yen next fiscal year, the survey showed. The finance ministry will announce its issuance plan on Dec. 19.

The Asahi newspaper reported yesterday that the government plans to provide 3 trillion yen to large and midsize businesses by buying their commercial paper and lending money at low rates.

The plan may alleviate pressure on bank lending and lead to lower money-market rates, allowing investors to borrow more money to invest in bonds, said Hitomi Kimura, a bond strategist at JPMorgan Securities Japan Co., another primary dealer.

“It’s positive for the money-market for now,” Tokyo-based Kimura said. “Two- and five-year notes will have room to rally if rates come down.”

One-month commercial paper with the second-strongest credit rating yielded 1.9 percent yesterday, more than double the Tokyo interbank offered rate for yen loans, according to Tokyo Tanshi Co. Three-month Tibor rose to 0.915 percent yesterday, the 25th day of gains, Bloomberg data show.

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.