March 8, 2012 11:17 pm

Bond sales: Patriotism has golden reward

The spirit of Ganbare Nippon (“Go Japan!”) lives on in the bond markets. The rallying cry that united a nation last year is inspiring buyers of the government’s special 10-year bonds, issued to fund the reconstruction of the tsunami-hit Tohoku region.

Holders of the bonds get virtually no income: just four basis points a year after tax, which is not much higher than the average bank account.

But if they buy more than Y10m ($123,000) of the debt, and hold it for three years, they will receive a commemorative gold coin weighing 15.6g. At today’s prices, the coin would be worth about $852 – equivalent to almost six times the post-tax return from the bond.

It is a nice extra, but not entirely necessary. Even without the prospect of a lump of precious metal, the bonds, which went on sale on March 5, for distribution in early April, might have flown off the shelves, say analysts. Naka Matsuzawa, chief investment strategist at Nomura, says buyers of reconstruction bonds have pitched in out of “a sense of patriotism”.

In December, for example, the Ministry of Finance sold reconstruction bonds to retail investors with coupons a third lower than those offered to institutions.

To help sales along, buyers received a note of thanks from finance minister Jun Azumi. He said he would personally buy Y1m-worth of the bonds, and encouraged other cabinet members to follow his lead.

“I personally want to buy them for myself, though whether I will be pleased with receiving my own thank-you letter is a separate issue,” he told a press conference.

Joking apart, the market is worth cultivating. Individual investors’ collective exposure to Japanese government bonds (JGBs) is relatively small, at 3.9 per cent of the total outstanding at the end of September.

But the state’s financing burden has grown so huge – gross JGBs of Y959tn in February, or Y7.5m ($92,000) for every man, woman and child – that it makes sense for the government to seek fresh support.

Retail investors are particularly attractive, say analysts, as they tend to hold bonds until maturity, lending stability to the market.

In the fiscal year to the end of March 2012, Y1.5tn of the Y11.6tn in reconstruction bonds was set aside for individuals. In the coming fiscal year, when MoF plans to issue another Y2.7tn, that 13 per cent share should rise to about 93 per cent. If demand is greater than expected, MoF says it could scrap plans to issue reconstruction bonds to institutional investors and focus solely on the retail segment.

MoF has tried various strategies to lure individuals to JGBs in the past. An advertising campaign two years ago tried the ancient tactic of sex appeal, featuring what it claimed to be interviews with women praising men who invest in stable assets such as government bonds.

Last June MoF introduced “Dr JGB”, a bow-tied mascot on Twitter, as it revised the way it paid interest on floating-rate 10-year bonds to give retail investors a slightly better deal.

It also successfully lobbied Japan’s Financial Services Agency, the financial watchdog, to exempt JGBs from the Financial Instruments and Exchange Law, enacted in September 2007, which requires sellers of financial products to explain all the risks to customers before making a sale.

“In spite of global concerns over fiscal sustainability, and the threat of contagion from European sovereign problems, the JGB market has continued to perform well,” says Takehiro Sato, economist at Morgan Stanley MUFG. Even so, he says, “diversification of the investor base is important.”

Stirring a sense of national pride may be a smart way of going about it.

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