Thursday, June 2, 2011

Japan PM's Survival Helps JGBs, Some Stocks, But Risks Remain

TOKYO (Dow Jones)--Japanese Prime Minister Naoto Kan's survival of a no-confidence vote Thursday helped government bonds and certain stocks by dispelling concern over an imminent government implosion, though plenty of political uncertainty remains to keep markets on edge.

Kan's success in buying more time was enough to prod investors to buy back the government debt they had recently been selling, sending lead Japanese government bond futures to a new high for 2011. While it was unclear who would have replaced Kan if he had been toppled, there had been concern a newcomer would not share his relative fiscal hawkishness.

"The JGB market feared that political turmoil might lead to pressure to expand fiscal spending, but now the current cabinet is expected to continue, at least for the time being," said Chotaro Morita, head of Japan fixed income strategy research at Barclays Capital. "So investors in the JGB market covered their short positions."

Kan appeared to placate opponents on Thursday by offering, hours before the vote, to step down once progress is made on measures to deal with the country's March 11 disaster. Analysts said the vague arrangement means longer-term details on reconstruction spending, tax reform and efforts to compensate victims of the Fukushima Daiichi nuclear power plant disaster remain unclear. But at least there won't be a new government starting from scratch, they said.

The continuity of the current Cabinet means bond investors can go back to focusing on the mounting signs of a global economic slowdown that argue strongly for bets on safe-haven assets like government debt.

Thursday's vote came after Moody's Investors Service on Tuesday placed Japan's sovereign debt ratings on review for a possible downgrade, in part due to recent political infighting. While no one should expect a streamlined decision-making process due to Thursday's developments, at least it doesn't exacerbate the situation, analysts said.

"There is still a risk that the political turbulence could lead to some steepening of the JGB yield curve due to a slightly higher risk premium," said Nhan Ngoc Le, a strategist at Morgan Stanley MUFG Securities. But any steepening should be limited as the focus returns more fully to recent weakness in U.S., Chinese and some European economic data, Le said.

 "The question remains, if you sell JGBs, what are you going to buy?the continuation:

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