Tokyo - Japanese government bonds are headed for the longest run of annual gains on record, buoyed by central bank purchases equivalent to Malaysia's economic output.
The bonds have returned 2.1 percent on an annualized basis in 2012, set for a ninth year of gains that's the longest streak since at least 1986, a Bank of America Merrill Lynch index shows. Ten-year yields declined 22 basis points to 0.76 percent through. U.S. Treasuries are poised to post a third annual gain with a similar return, while the benchmark rate has fallen 11 basis points.
The Bank of Japan's JGB holdings increased 23.5 trillion yen ($279 billion) in 2012 as it sought to pump funds into a deflation-plagued economy that contracted for two quarters through Sept. 30. With incoming Prime Minister Shinzo Abe planning a "large-scale" extra budget to bolster growth, analysts forecast the 10-year yield will rise to 0.99 percent by the end of 2013, a Bloomberg survey shows, which would still be the third lowest globally.
"Public-works spending will kick start the economy" under an Abe administration, said Koichi Kurose, chief economist in Tokyo at Resona Bank Ltd., which oversees about $178 billion. "But the BOJ will increase asset purchases to keep a lid on borrowing costs."
Abe, the leader of the Liberal Democratic Party, will become prime minister in a special session of the lower house of parliament Tuesday, after his party's coalition won a majority in elections on Dec. 16. It will be his second term at the nation's top office, the first ending in September 2007 when he resigned citing health reasons.
The world's third-largest economy is likely resume growth from the first three months of next year, while consumer prices will probably continue to fall at least through June, according to median estimates of economists surveyed by Bloomberg. The government will strike an "accord" with the central bank which will have a 2 percent inflation target, the LDP said in its election pledges.
The central bank, which set an inflation goal of 1 percent in February, will discuss "medium- to long-term price stability" at its next meeting in January, the BOJ said in a statement after a two-day policy meeting that concluded on Dec. 20.
BOJ Governor Masaaki Shirakawa, who's due to step down in April, and his board voted to add 10 trillion yen to its 66 trillion-yen program that buys securities, including government debt maturing in three years or less.
The BOJ owned 113.7 trillion yen of government securities as of Dec. 10, the most at least since 1997, according to central bank figures compiled by Bloomberg.
Japan's corporate bonds have returned 1.4 percent on an annualized basis this year, compared with an 11 percent gain in company notes worldwide, Bank of America Merrill Lynch indexes show.
Five-year credit-default swaps that insure Japan's sovereign debt were at 80.4 basis points on Dec. 21, down 63 basis points from the end of last year, according to CMA, a data provider owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. A drop signals improving perceptions of creditworthiness.
The yen has fallen about 5 percent since Nov. 15 when Abe called for unlimited cash infusions by the Bank of Japan to end deflation. Outgoing Prime Minister Yoshihiko Noda dissolved parliament the next day, spurring this month's elections. The Japanese currency traded at 84.41 per dollar as of 5:42 p.m. in Tokyo Monday after touching 84.62 on Dec. 19, the weakest since April 2011.
The nation's financial markets were shut Monday for a national holiday.
The benchmark 10-year bond yield rose 3 1/2 basis points last week, or 0.035 percentage point, to 0.76 percent. It dropped to 0.685 percent on Dec. 6, the least since June 2003 when all-time lows were set.
The Ministry of Finance will auction 2.7 trillion yen of two-year notes Wednesday in its last debt offering this year. Yields on government notes maturing in one to three years have collapsed to about 0.1 percent amid purchases by the BOJ.
The LDP may unveil an extra budget of as much as 10 trillion yen to fuel growth, according to separate estimates by Barclays Plc and Bank of America Merrill Lynch. The party has also proposed 15 trillion-yen in measures to defend against natural disasters, a plan posted on the LDP's website shows.
The nation's consumer prices excluding fresh food have fallen at an average of 0.2 percent every month in the past 10 years, reducing wages and discouraging consumer spending. Japanese households held 840 trillion yen of cash and bank deposits at the end of September, up 9.4 percent from 2002, according to central bank figures.
"As long as the BOJ's monetary easing solidly anchors the shorter end of the yield curve, a rise in bond yields is unlikely," said Teruyoshi Sotome, a Tokyo-based senior bond strategist at Mizuho Securities Co., one of the 25 primary dealers obliged to bid at government debt sales. "Even when the government spends, money will just flow into people's savings."