Japan's successful Olympics bid could help inflation-linked bonds

TOKYO (REUTERS) - One early Tokyo Olympics winner could emerge next month, when Japan holds its first offering of inflation-linked bonds in five years.

Tokyo's successful bid for the 2020 Olympic Games is likely to fan inflation expectations, which in turn should kindle demand when the Ministry of Finance offers the first tranche of 300 billion yen (S$3.85 billion) of 10-year inflation-protected bonds on Oct 8.

"Wherever the Olympics is held, real estate prices tend to go higher. That speculative money might come into Japan, and that might help alleviate deflationary pressure, so it's positive for inflation expectations as well," said Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments.

"To that extent, I think it's positive for inflation-linked bonds," said Mr Matsukawa, who is considering buying some for his portfolio.

The coming Tokyo Olympics could have a slightly negative effect on Japanese government bonds overall, to the extent that they push up stock prices and heighten fears about Japan's fiscal woes.

Japan's public debt is double the size of its US$5 trillion (S$6.36 trillion) economy, the biggest among major industrialised nations. The Olympics plan estimates a non-Games budget of about US$4.4 billion, compared with US$3.4 billion for the actual event, and already has a war-chest of some US$4.5 billion in the bank.

On the positive side, the Tokyo Olympic bid committee said hosting the Games will add some 3 trillion yen to the economy.

This jolt would come on top of the Bank of Japan's massive monetary easing under which it will nearly double the monetary base to 270 trillion yen by the end of 2014 to achieve its 2 percent inflation target.

There's a long way to go: Japan's core consumer prices rose 0.7 percent in July from a year earlier, marking the second straight month of gains and hitting a near-five year high, but still well shy of 2 percent.

Japan's finance ministry issued inflation-indexed bonds from 2004 until 2008, but halted when the global financial crisis cemented deflation expectations and demand for them dried up.

Unlike the old instruments, in which the principal increased in line with inflation and decreased in line with deflation, the new bonds will have a principal guarantee component, so their principal will not fall below a set floor even if prices resume dropping. That could make them more attractive to investors who fear deflation as much as inflation.

"Japanese aren't used to inflation, so they have no mental need to hedge, and I don't think there are enough sophisticated investors who believe inflation needs to be hedged in Japan," said Shogo Fujita, chief Japan bond strategist at Bank of America Merrill Lynch in Tokyo.

"The inflation-linked bond market has always been an foreign-investor driven market, and I think it will remain so for the foreseeable future," Mr Fujita added.