Tokyo, Mar 12: Call them the Tokyo limbo kings. Fuelled by pessimism over the state of the world's second-largest economy, traders and investors have pushed yields on Japanese government bonds (JGBs) so low they'd challenge even the most limber financial contortionists.On Thursday, traders sent the yield on the benchmark 182nd government bond to a record low for a third consecutive day, pushing it to 1.495 per cent.At yields that low, some might wonder why investors continue to chase bonds.
But market participants say that with other yen-denominated investments -- most notably the stock market -- unappealing, fixed-income products are unlikely to give up their record-setting ways.
Moreover, they say the economy will likely slow as the government continues to disappoint the markets with efforts to stimulate the economy and Japan's native deflation is spurred by falling prices imported from crisis-ridden Asia.
The result: More money in the fixed-income bunker. "Bonds are the only game in town," said Andrew Shipley, economist at Schroders Securities Japan Ltd, who forecasts the key interest rate will fall to at least 1.400 per cent by the end of the year -- and probably further.
Shipley's isn't the only voice calling for lower yields. Many economists, traders and fund managers say that as the state of the economy goes from bad to worse, rates below 1.5 per cent will be the theme over the coming three months.
To be sure, not everyone is convinced the market's strength is real. They argue that rather than moving on economic fundamentals, the market is moving on pure momentum.
"This bond market is reminiscent of the good old Nikkei days when 39,000 in the stock market made sense to everyone," said a dealer at a European bank, alluding to the "bubble" era of the late 1980s when all of Japan's assets seemed to rise effortlessly.
But most say the bond market will continue to rise -- pushing yields lower -- as the economy brakes from the double whammy of slow growth and deflation imported from Asia.
"The economy is decelerating on every cylinder," says Jeffrey Young, chief Japan economist at Salomon Smith Barney, who says rates will likely bob below the 1.500 per cent level until the government steps up with a credible package of economy-boosting measures.
The earliest that's likely to come, says Young, is later this spring when politicians begin focusing on the economy to woo support for July's Upper House elections.
More threatening to some is the prospect of continued falling prices, which make bonds more attractive to investors but hinder efforts to get the economy rolling.
"We're in a deflationary environment. The economy is slowing and the government's options are limited," said Schroders' Shipley. "The economy needs restructuring and that is near-term deflationary."
Inflation, as measured by the consumer price index, rose 1.8 per cent in January from a year earlier. But economists are quick to point out that the figure includes the two-percentage-point increase in the consumption tax that went into effect last April. Correct for the increased tax burden and prices actually fell 0.2 per cent, they say.
The combination of slow growth and falling prices has some investors thinking the Japanese economy hasn't seen the worst yet.
"We could have a bit of a crisis this summer," said Peter Morgan, portfolio manager at Banque Nationale de Paris. "The yield could easily go to 1.25 per cent."
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
