Support for a new foreign-bond fund isn’t universal.
“I personally think it won’t happen,” said Naruki Nakamura, head of fixed income at BNP Paribas Investment Partners Japan in Tokyo, which has the equivalent of $8.7 billion in assets. “There’s no need to boost yen weakness. It’s a myth. I’m not sure the new administration wants unlimited inflation,” he said in a telephone interview Jan. 4.
Working against Abe’s plan is the decade-long pattern of the yen strengthening alongside U.S. debt. Moves in the 10-year Treasury note and the yen were correlated 60% of the time in 2012 on a weekly basis, reflecting their roles as havens from risk. Since the start of the financial crisis in August 2007, the yen appreciated 33% against the dollar, while yields on 10-year U.S. government debt fell to 1.87% from 4.74%.
Japan bought $76.9 billion of Treasuries in September 2011 and $59.9 billion in November 2011, its two largest monthly purchases. The 10-year U.S. note yield plunged 0.31 percentage point to 1.92% in September 2011 as Europe’s sovereign debt crisis worsened, and in November 2011 dropped 0.05 percentage point to 2.07%.
These turned out to be good investments. Treasuries returned 2.1% in 2012, or 15% after accounting for the dollar’s gain against yen, according to EFFAS index data compiled by Bloomberg. Japanese government bonds gained 1.8%, with only Swedish government securities returning less among 26 sovereign debt markets tracked by the gauges.
Treasury yields and the value of the yen last fell in tandem between January 2000 and October 2001, as U.S. stock prices declined 21% from then-record highs and as the Fed lowered borrowing costs to address a recession. The currency depreciated to 122 per dollar from 103 as 10-year yields slid to 4.23% from 6.44%.