Japan Inc gloom signals bond rebound from first loss since 2013

[TOKYO] Executives of Japan's biggest companies predict deteriorating growth in the months ahead, a sign of the economy's weakness that may help the nation's bonds rebound from their first quarterly loss since June 2013.

The Bank of Japan's quarterly Tankan large manufacturer index came in below estimates in March and is forecast to drop in June, the second straight period in which responses pointed to a decline of business sentiment in the months ahead. Japanese bonds were the worst-performing government securities in the first quarter except for Greek debt, dropping 0.5 per cent, according to data compiled by Bloomberg.

The corporate gloom underscores the view that the rebound in the world's third-largest economy will not be as quick as the central bank has projected, reigniting expectations that BOJ Governor Haruhiko Kuroda will have to expand already record monetary easing this year, according to Mitsubishi UFJ Morgan Stanley Securities Co. Companies plan to reduce capital expenditure by 1.2 per cent in the fiscal year through March 2016, the Tankan survey released Wednesday showed.

"The pace of the recovery has lacked sharpness," said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley in Tokyo. "It's just a matter of time before the pickup in inflation expectations and narrowing of the supply- demand gap stall, reviving expectations for additional easing. This is a good reason to start buying bonds on dips."

The 0.5 per cent drop in JGBs in the first three months of the year was the worst performance since a 1.7 per cent loss in the second quarter of 2013, when Kuroda's unveiling of unprecedented easing stoked market volatility after initially depressing yields, Bank of America Merrill Lynch data show.

The benchmark 10-year bond yield was 0.365 per cent as of 9.34am in Tokyo, after swinging from as low as 0.195 per cent on Jan 20 to an almost four-month high of 0.47 per cent on March 10.

By contrast with the loss for notes in the first quarter, Japan's Topix stock index returned 10.4 per cent including reinvested dividends. The results of the Tankan survey underscore that equity valuations have become disconnected from economic fundamentals, according to Mizuho Bank Ltd.

"The stock market is in need of a correction," Daisuke Karakama, the lender's Tokyo-based chief market economist, said by phone on Wednesday. "That will favour bonds."

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The BOJ's main gauge of consumer prices, which strips out fresh food and the effects of last year's sales-tax increase, showed inflation grinding to a halt in February, compared with its target of 2 per cent. Japanese companies forecast price gains of 1.4 per cent on average in one year's time, the same pace as they projected in December, the central bank said on Thursday.

In the most recent Bloomberg survey in March, 23 of 34 economists said the BOJ will expand monetary stimulus by the end of October.

HSBC Holdings Plc predicts the central bank could act as early as its two-day meeting from April 7. The BOJ is buying as much as 12 trillion yen (US$100 billion) of debt a month, equivalent to more than 90 per cent of notes sold to investors.

"With Kuroda, thhe whole point is the element of surprise," said Izumi Devalier, HSBC's Hong Kong-based Japan economist, who expects JGB yields to stay low. "The next easing will come when no one expects it."

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