* Japan issues first inflation-linked bonds in 5 years
* Auction produces break even inflation of 1.00 percent
* Demand boosted by sweetener such as deflation floor,
* Domestic investors' appetite still not strong
By Hideyuki Sano
TOKYO, Oct 8 Japan's first sale of
inflation-linked government bonds in five years attracted strong
demand on Tuesday, a welcome sign of rising inflation
expectations for Prime Minister Shinzo Abe, who has vowed to
revitalise the economy by ending deflation.
Yet, market players also say it is too early to declare
victory for Abenomics, with the pricing of the bonds suggesting
investors still do not believe Abe can boost inflation to two
percent, as pledged.
"Some market players bought aggressively because it was the
first time in many years. But we will have to see whether strong
demand will continue," said Mari Iwashita, chief market
economist at SMBC Nikko Securities.
The 17th inflation-linked 10-year JGBs (JGBi), carrying 0.1
percent coupon, was sold at a yield of minus 0.352 percent.
That was about 100 basis points, or one percentage point,
less than the yield on the conventional 10-year bonds, which
stood at 0.650 percent at the time of auction.
This means the return from the inflation-linked bonds would
be larger than the regular bonds only if inflation over the next
10 years will be above 1.0 percent.
The gap between the two yields is thus called the break even
inflation rate and seen as a gauge of investors' inflation
The strong sale came as Japan appears to have reversed
deflation. Core consumer prices in August rose 0.8 percent from
a year earlier, the biggest rise since November 2008, having
stopped falling in May.
The auction's break even rate of 1.00 percent was about 0.10
percentage point higher than many traders had expected.
"The auction went very well. You could say that Japan has
been stuck in deflation but things are changing now," said
Tadashi Matsukawa, head of fixed income investment at PineBridge
Investments in Tokyo.
Analysts say, however, that stripping out the effect of the
two planned sales tax hikes, one in April 2014 and the other in
October 2015, the auction results suggest the market expects an
inflation of about 0.7 percent over the next 10 years.
That is still well below the Bank of Japan's target of 2.0
percent, reflecting doubts shared by investors that inflation is
unlikely to accelerate when wages are hardly rising.
The Ministry of Finance also offered some sweeteners to
investors, setting a deflation floor on the new issue and
offering buyback of previously issued price-linked bonds without
such a floor.
Japan suspended issue of inflation-linked bonds in 2008,
when the global financial crisis plunged the country back into
deflation and caused massive losses on inflation-linked JGBs.
Indeed, a big part of demand likely came from investors,
many of them foreign, who wanted to get rid of old
inflation-linked bonds through the buyback scheme, market
In contrast, Japanese investors' appetite remained subdued.
Although some Japanese regional banks are said to have shown
interest in the new issue, pension funds, a type of investor who
would have wanted inflation-linked bonds to hedge their
inflation-prone liability, were mostly sitting on the sidelines.
For many of them, fear of inflation may be hard to imagine
as the last time core inflation was steadily above 3 percent was
"Most working age Japanese haven't really experienced
inflation. They only know deflation," said a derivatives trader
at a major Japanese bank.