Yen’s plunge risks haven status as bonds fare worst

By Wes Goodman

Bloomberg

The yen’s 12% plunge this year and a debt rating cut by Moody’s Investors Service dented the perception that Japan’s assets are a haven from market turmoil.

While Japan’s currency rose versus the dollar in 2008 during the global financial crisis and in 2010 as Europe’s debt crisis spread, it’s slumped to a seven-year low past 120 against the greenback even as a Bloomberg Global Poll of investors showed the world economy is in its worst shape in two years. Japan’s bonds are the worst-performing government debt securities among developed markets in 2014 and the cost of protecting them from default surged to a 13-month high.

Prime Minister Shinzo Abe, who faces an election in nine days, was forced to backtrack on the second stage of raising the sales tax after the first increase in April threw the world’s third-largest economy into a recession. The Bank of Japan is trying to spur growth by pumping record amounts of yen into the banking system via purchases of government debt. Bond interest payments have tumbled, with five-year yields approaching zero, leaving investors without a cushion if debt prices slump.

“I find it hard to look at Japan as a safe haven given the fundamentals,” said Hans Goetti, the Singapore-based head of investment for Asia at Banque Internationale a Luxembourg SA, which has about $36bn in assets. “You’re seeing currency debasement and yields are ridiculously low,” he said in a December 2 telephone interview.

The International Monetary Fund said in a working paper published last year that the yen is “widely considered a safe- haven currency.”

The currency surged 46% in 2008 and 12% in 2010, according to the Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. It rallied 5.2% in the week following the earthquake and tsunami of March 11, 2011, which crippled a power plant in the worst nuclear accident since Chernobyl. The yen had three one-day gains of more than 2% in 2013, each driven by demand for safety, according to the indexes.

It hasn’t risen that much once this year, even though 38% of those surveyed in the Bloomberg Global Poll in November described the world economy as worsening, more than double the number in July.

Abe increased Japan’s sales tax to 8% from 5% in April to try to curtail borrowing that has increased the nation’s debt to 1 quadrillion yen ($8.3tn). The levy ended up eating into consumption and pushing the economy into a recession, prompting him to call an election December 14 to seek a mandate from voters.

Moody’s this week cut Japan’s rating by one step to A1, citing uncertainty over whether the nation will achieve its deficit-reduction goals and succeed in boosting growth. Corporate bankruptcies related to the weak yen totalled 42 last month, the most on a monthly basis since surveying started in January 2013, Teikoku Databank Ltd said in a report yesterday. The number is likely to continue to rise as the BoJ expands monetary easing, according to the report.

Central bank Governor Haruhiko Kuroda is doing his part to spur the economy with a plan to expand the bank’s holdings of government debt by an unprecedented ¥80tn annually.

While the purchases have helped buoy government bonds this year, sending five-year yields to a record low of 0.065% last week, government securities are lagging behind their peers.

Bonds in an index of Japanese sovereign debt due in more than 12 months have returned 3.2% in 2014. That’s the worst performance of 26 debt markets around the world compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Credit-default swaps, used by investors to hedge against bond losses or to speculate on creditworthiness of Japan’s sovereign debt, climbed to 62 basis points this week, the highest level since October 2013.

Rajeev De Mello at Schroder Investment Management Ltd in Singapore said he’s not ready to give up on Japan as a haven. Japanese holdings of investments abroad generate earnings that money managers and companies send back home, De Mello said. These flows will underpin the yen as support for the currency from trade ebbs, he said.

The nation has a net international investment position of a record 325tn yen, equivalent to about $2.71tn. It owns $1.22tn of the US debt.

As imports outpace exports, Japan has run a trade deficit since the middle of 2012.

“I still like the yen as a safe haven,” De Mello said in a telephone interview December 1. “You’ve got coupons from the Treasuries, you’ve got dividends from stocks and you’ve got earnings from the companies” funnelling money to Japan, he said.

The yen accounted for about 4% of international reserve assets at the end of June, almost matching the average over the past 15 years, according to IMF data.

Dan Fuss, whose Boston-based Loomis Sayles Bond Fund beat 97% of its peers over the past five years, said Japan’s territorial dispute with China over a group of islands is another reason to stay away.