http://www.bloomberg.com/apps/news?pid=20601087&sid=aulxrM11lEic&pos=6
Swaps Signal Worst Yen Since 2005 as Debt Overwhelms (Update1)
By Chris Fournier and Yasuhiko Seki
Nov. 16 (Bloomberg) -- The yen is poised for its worst tumble since 2005 as doubts about Japanâs fiscal footing double the cost of insuring its debt.
The price of hedging against losses on $10 million of the countryâs bonds with credit-default swaps soared this month to as much as $76,160 a year from $37,000 in August, as the new government planned record spending and borrowing even with tax revenue falling. The rise in debt protection costs contrasts with that of the U.S., where prices have fallen to about the lowest in a year amid unprecedented issuance. The difference in prices reached the widest ever on Nov. 9 after Japanâs debt grew to almost twice the size of the economy.
âThe Japanese fiscal situation is horrific,â said Richard Benson, who helps oversee $11 billion of currency funds at Millennium Global Asset Management in London. âWe went short the yen against the dollar and the euro about a month agoâ and then turned âmore aggressiveâ on the trade as credit-default swaps rose and investors dumped Japanese bonds, he said, declining to specify the firmâs gains. Selling yen for euros and dollars would have returned as much as 4.3 percent since Oct. 1, data compiled by Bloomberg show.
Japanâs unprecedented debt, near-zero benchmark interest rate, ballooning budget deficit, sinking savings rate and worst postwar recession all are aligned against the yen.
Standing Alone
The Bank of Japan will stand alone in keeping borrowing costs at near-record lows next year to revive the Group of 10âs fastest-shrinking economy, making its assets less attractive to investors, median Bloomberg survey predictions show. The worldâs second-biggest economy last year at $4.9 trillion will contract 5.7 percent in 2009, compared with an average of 2.5 percent for the nine other largest economies, according to median forecasts.
âWe canât rule out the possibility of capital flight away from Japan due to its deteriorating fiscal position,â said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, Franceâs third-largest bank.
The yen has outperformed all 171 other currencies tracked by Bloomberg over the past two years, appreciating 24 percent to 89.53 per dollar today. The currency is up 12.9 percent from a five-month low on April 6, and has gained 1.3 percent this year. Now, 34 of 38 strategists in a Bloomberg survey see it falling by June 2010, including Landesbank Baden-Wuerttemberg, the most accurate of 46 forecasters in the six quarters ending June 30.
Steep Tumble
The Stuttgart-based bank predicts a 9.9 percent decline to 100 from 90.09 at the end of October, which would be the steepest eight-month drop in four years. Goldman Sachs Group Inc. in New York forecasts 105 in 12 months, a 14.8 percent slide from the Nov. 13 close.
Option traders are the least bullish on the yen since July 2007 after the spread between demand for three-month contracts to buy and sell the currency narrowed by the most ever in the past year, so-called risk-reversal rates show.
âDeclines in risk reversal rates suggest underlying strong pressure to sell the yen,â Societe Generaleâs Saito said.
Outstanding government loans and bonds totaled a record 864.5 trillion yen ($9.6 trillion) on Sept. 30, making Japan the worldâs most indebted nation. Thatâs 181 percent of gross domestic product, up from 94 percent a decade earlier and the most among the 30 countries of the Organization for Economic Cooperation and Development, which averages 79 percent. The U.S. has about $7 trillion of marketable debt outstanding, or about 50 percent of its GDP, according to government data.
Increased Unease
While credit-default swaps indicate less than a 6 percent chance the worldâs second-largest foreign-reserves holder will default, they show increased unease with the debtâs quality.
The five-year contracts cost 67.42 basis points, or 0.6742 percentage point, of the sum covered a year. Of 20 developed countries tracked by Bloomberg, only Greece, Ireland, Spain and Italy have pricier swaps. Insuring the debt of Slovakia and Slovenia, which have the same credit ratings as Japan or worse, is cheaper.
Hedging against losses on U.S. bonds cost 27.5 basis points on Nov. 13, down from 100 on Feb. 24. The U.S. will sell a record $2.1 trillion in Treasuries this year and $2.5 trillion next, according to London-based Barclayâs Plc, one of 18 primary dealers that trade with the Federal Reserve. Government bond yields are used as a benchmark for companies such as Shiseido Co., Japanâs biggest cosmetics maker, and brewer Kirin Holdings Co. as they sell debt.
âDifficultâ Situation
âItâs not really a question of defaultâ by Japan, said Carlos Leitao at Montreal-based Laurentian Bank Securities, the second-most accurate economist in a Bloomberg survey last year. âItâs more the situation becoming so difficult, the government is forced to adopt more restrictive fiscal policies to bring deficits under control. That would further slow the economy.â
Finance Minister Hirohisa Fujii said on Nov. 10 that âmaintaining the trust of investors in the government bond market is our priorityâ because âthe most pressing issue we have to bear in mind when we outline next fiscal yearâs budget is that government bond yields are surging.â
International demand is already faltering. Foreign investors have sold a net weekly average of 130 billion yen in Japanese bonds this year, after averaging 94 billion in purchases the prior five years, Ministry of Finance data show.
Yields on 10-year bonds, which reached 1.485 percent this month on an intraday basis, the highest since June, may rise toward 1.7 percent, said Kazuto Uchida, chief economist for Bank of Tokyo Mitsubishi UFJ Ltd., Japanâs biggest lender.
Continued
Swaps Signal Worst Yen Since 2005 as Debt Overwhelms (Update1)
By Chris Fournier and Yasuhiko Seki
Nov. 16 (Bloomberg) -- The yen is poised for its worst tumble since 2005 as doubts about Japanâs fiscal footing double the cost of insuring its debt.
The price of hedging against losses on $10 million of the countryâs bonds with credit-default swaps soared this month to as much as $76,160 a year from $37,000 in August, as the new government planned record spending and borrowing even with tax revenue falling. The rise in debt protection costs contrasts with that of the U.S., where prices have fallen to about the lowest in a year amid unprecedented issuance. The difference in prices reached the widest ever on Nov. 9 after Japanâs debt grew to almost twice the size of the economy.
âThe Japanese fiscal situation is horrific,â said Richard Benson, who helps oversee $11 billion of currency funds at Millennium Global Asset Management in London. âWe went short the yen against the dollar and the euro about a month agoâ and then turned âmore aggressiveâ on the trade as credit-default swaps rose and investors dumped Japanese bonds, he said, declining to specify the firmâs gains. Selling yen for euros and dollars would have returned as much as 4.3 percent since Oct. 1, data compiled by Bloomberg show.
Japanâs unprecedented debt, near-zero benchmark interest rate, ballooning budget deficit, sinking savings rate and worst postwar recession all are aligned against the yen.
Standing Alone
The Bank of Japan will stand alone in keeping borrowing costs at near-record lows next year to revive the Group of 10âs fastest-shrinking economy, making its assets less attractive to investors, median Bloomberg survey predictions show. The worldâs second-biggest economy last year at $4.9 trillion will contract 5.7 percent in 2009, compared with an average of 2.5 percent for the nine other largest economies, according to median forecasts.
âWe canât rule out the possibility of capital flight away from Japan due to its deteriorating fiscal position,â said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, Franceâs third-largest bank.
The yen has outperformed all 171 other currencies tracked by Bloomberg over the past two years, appreciating 24 percent to 89.53 per dollar today. The currency is up 12.9 percent from a five-month low on April 6, and has gained 1.3 percent this year. Now, 34 of 38 strategists in a Bloomberg survey see it falling by June 2010, including Landesbank Baden-Wuerttemberg, the most accurate of 46 forecasters in the six quarters ending June 30.
Steep Tumble
The Stuttgart-based bank predicts a 9.9 percent decline to 100 from 90.09 at the end of October, which would be the steepest eight-month drop in four years. Goldman Sachs Group Inc. in New York forecasts 105 in 12 months, a 14.8 percent slide from the Nov. 13 close.
Option traders are the least bullish on the yen since July 2007 after the spread between demand for three-month contracts to buy and sell the currency narrowed by the most ever in the past year, so-called risk-reversal rates show.
âDeclines in risk reversal rates suggest underlying strong pressure to sell the yen,â Societe Generaleâs Saito said.
Outstanding government loans and bonds totaled a record 864.5 trillion yen ($9.6 trillion) on Sept. 30, making Japan the worldâs most indebted nation. Thatâs 181 percent of gross domestic product, up from 94 percent a decade earlier and the most among the 30 countries of the Organization for Economic Cooperation and Development, which averages 79 percent. The U.S. has about $7 trillion of marketable debt outstanding, or about 50 percent of its GDP, according to government data.
Increased Unease
While credit-default swaps indicate less than a 6 percent chance the worldâs second-largest foreign-reserves holder will default, they show increased unease with the debtâs quality.
The five-year contracts cost 67.42 basis points, or 0.6742 percentage point, of the sum covered a year. Of 20 developed countries tracked by Bloomberg, only Greece, Ireland, Spain and Italy have pricier swaps. Insuring the debt of Slovakia and Slovenia, which have the same credit ratings as Japan or worse, is cheaper.
Hedging against losses on U.S. bonds cost 27.5 basis points on Nov. 13, down from 100 on Feb. 24. The U.S. will sell a record $2.1 trillion in Treasuries this year and $2.5 trillion next, according to London-based Barclayâs Plc, one of 18 primary dealers that trade with the Federal Reserve. Government bond yields are used as a benchmark for companies such as Shiseido Co., Japanâs biggest cosmetics maker, and brewer Kirin Holdings Co. as they sell debt.
âDifficultâ Situation
âItâs not really a question of defaultâ by Japan, said Carlos Leitao at Montreal-based Laurentian Bank Securities, the second-most accurate economist in a Bloomberg survey last year. âItâs more the situation becoming so difficult, the government is forced to adopt more restrictive fiscal policies to bring deficits under control. That would further slow the economy.â
Finance Minister Hirohisa Fujii said on Nov. 10 that âmaintaining the trust of investors in the government bond market is our priorityâ because âthe most pressing issue we have to bear in mind when we outline next fiscal yearâs budget is that government bond yields are surging.â
International demand is already faltering. Foreign investors have sold a net weekly average of 130 billion yen in Japanese bonds this year, after averaging 94 billion in purchases the prior five years, Ministry of Finance data show.
Yields on 10-year bonds, which reached 1.485 percent this month on an intraday basis, the highest since June, may rise toward 1.7 percent, said Kazuto Uchida, chief economist for Bank of Tokyo Mitsubishi UFJ Ltd., Japanâs biggest lender.
Continued
