Market Outlook - BNP PARIBAS - Investment Services India

JGBs: Supply Continues to Weigh
• The impact of the Ozawa scandal on the
Japanese economy and equity market is likely
to be limited.
• The supply-demand situation for JGBs is
far more important to the bond market and JGB
issuance will soar as tax revenues fall.
• If uncertainties retreat and equity prices
rise, institutional investors’ dependency on the
benefits of carry will ease somewhat.
• This would be a destabilising development
for the medium sector of the curve where
banks have increased their long positions.
Table 1: Outlook for JGB Supply and Demand
(JPY trn)
Issued to
market
(A)
Redeemed
from market
(B)
Bought back
by MoF
(C)
Outright
purchase by
BoJ (D)
Jan-2010 9.2 1.6 0.3 1.8 5.5
Feb-2010 9.5 1.5 0.3 1.8 5.9
Mar-2010 9.5 11.3 0.3 1.8 -3.8
Net supply
(A – B – C – D)
(Y/Y)
Apr-2010 9.5 1.6 0.25 1.8 5.8 (+1.9)
May-2010 9.2 1.6 0.25 1.8 5.6 (+2.0)
Jun-2010 9.5 9.6 0.25 1.8 -2.2 (+3.0)
Source: BNP Paribas
Impact of political scandal is likely to be limited
Currently, the political situation is complicated in
Japan. The first regular Diet session since the
inauguration of the Hatoyama Cabinet was convened
on 18 January. It was a difficult launch for the DPJ:
opinion polls show that the popularity of the
government has fallen below 50% due to the arrest
of close associates of Secretary General Ozawa, the
DPJ’s top dog. The opposition will fiercely pursue the
nexus between politics and money that has
enmeshed both Ozawa and Hatoyama, seizing this
golden opportunity to target an abrupt reversal of
power.
However, the impact of the Ozawa scandal on the
Japanese economy and equity market will probably
be limited for two reasons. First, budgets will be
enacted. Following Ozawa’s testimony during a
voluntary hearing conducted by special investigators
from the Tokyo District Public Prosecutor’s Office,
the Budget Committee voted on the supplementary
budget on 25 January. The DPJ had the Lower
House pass it that same day and its overwhelming
strength in the Upper House points to the
supplementary budget’s eventual passage. The
same holds true for the main government budget for
2010.
Second, public support for the DPJ continues to far
outstrip that for the LDP. Support for the LDP has
continued to wither since ex-PM Koizumi retired;
even now, the scandals rocking the DPJ have not
become tailwinds for the LDP. Within the LDP,
opinion is split over the compulsory retirement at 70
for candidates standing for those Upper House seats
determined by proportional representation. This
disagreement, together with a lack of funds, suggests
that the LDP cannot target a reversal of power in this
summer’s Upper House elections.
Supply continues to weigh
Japanese demographics and the view that the LDP’s
age has passed lie behind the continued dominance
of the DPJ. Public support for the DPJ first surpassed
that for the LDP in 2007, the year that Japan’s baby
boomers turned 60 and began to retire. As the
average age of the population rises, the proportion of
the economically disadvantaged will increase and
public demands to rectify economic disparities and
perfect the social welfare system will intensify. These
developments underpin support for the DPJ.
Even though it is not as interesting as political
scandals, the supply-demand situation for JGBs is far
more important to the bond market,. When the FY09
second supplementary budget was approved on 25
January, estimates for FY09 tax revenues were
revised down to JPY 36.9trn and the issuance of new
financial resource bonds was revised up to
JPY 53.5trn. Although the MOF, in deference to PM
Hatoyama, has held down issuance of these bonds
to JPY 44trn in FY2010, final issuance will, in fact,
soar as tax revenues fall.
The short end will continue to find support, since the
BoJ has intensified its quantitative easing stance.
The JGB market will probably continue to lack
direction in the short term. However, if uncertainties
overseas and in the domestic political situation
retreat and equity prices rise, institutional investors’
dependency on the benefit of carry will ease
somewhat. This would be a destabilising
development for the medium sector of the curve
where banks have increased their long positions.
Koji Shimamoto 29 January 2010
Market Mover, Non-Objective Research Section
39
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