Bond Rout That Didn’t Happen in Japan Casts Stimulus Doubt

(Bloomberg) -- A stimulus package worth more than $200 billion would have led to a bond rout in any market. Not in Japan, where the yield curve held at its flattest level in three months.

The reason? Traders don't expect Prime Minister Shinzo Abe's government to actually spend the headline figure of 26 trillion yen ($239 billion), which means there won't be massive debt issuance.

A breakdown of the draft package shows actual central government spending of just 7.6 trillion yen, which analysts say is too small to move the needle for the markets or to drive economic growth.

“Given it's not a number that can boost economic growth and push up inflation to 2%, the impact over the bond market will be limited,” said Toru Suehiro, senior economist at Mizuho Securities Co. in Tokyo. “Considering the actual outlay, next year will just be slightly better than this year for the economy.”

Bonds hardly budged as details of Abe's plan emerged Thursday. While that left traders wanting, Thursday's auction of 30-year debt brought some cheer. A higher-than-estimated cut-off price at the sale saw the 10-, 20- and 30-year securities erase losses suffered earlier in the wake of Wednesday's sell-off in Treasuries.

With Japanese bonds in tenors up to 10 years yielding less than zero, the positive yield on super-long maturities is keeping investors interested and helping to limit any weakness in this zone. Local insurance companies have been persistent dip-buyers of these bonds at least since the BOJ started its unprecedented stimulus in April 2013.

To contact the reporter on this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani, Brett Miller

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