Dealers doubt Japanese can be put off NZ bond issues

The Government's bid to tame the dollar by scaring Japanese housewives out of New Zealand dollar bonds is unlikely to succeed, currency dealers and economists say.

A spokesman for Finance Minister Michael Cullen confirmed yesterday that Reserve Bank and Treasury officials had visited Japan in the past two months to speak to central bank representatives and key players in the uridashi market.

The New Zealand officials underlined the risk of investing in New Zealand dollar bonds.

News of the visit followed market rumours that a uridashi worth about $600 million had been cancelled as a result of talks between New Zealand and Japanese officials. The New Zealand dollar dropped overnight partly due to the market speculation.

Uridashis are bonds issued to Japanese "mum and dad" investors and denominated in New Zealand dollars. New Zealand's comparatively high interest rates make their returns substantially higher than most investments in Japan.

The issue of uridashis, and also of their European equivalent, eurokiwis, has been a key driver of demand for the New Zealand dollar on foreign exchange markets despite a slowing economy and gaping current account deficit. That in turn has kept the kiwi at record high levels - to the serious detriment of export earnings.

ANZ currency dealer Mark Elliott was sceptical that the Japanese central bank - the Bank of Japan - could do anything to reduce uridashi issuance which was primarily conducted by commercial entities.

"Private commercial entities enter into these transactions and I'm not sure what a sovereign would be able to do to discourage such transactions from taking place."

Cullen's spokesman said one of the purposes of the talks with Japan's central bank and uridashi issuers, including the World Bank and Asian Development Bank, was "to make sure that the risks associated with uridashis are better understood, given that we have been talking about the imbalances in the economy and where the dollar is in its cycle".

The value of the investment in uridashis could be significantly diminished should the New Zealand dollar depreciate during the term of the investment.

"The purpose of these visits is about educating players in the marketplace to make sure that the message is getting across to those who take up the bonds, the mums and dads in Japan, that there are risks associated with investing at this stage," the spokesman said.

But Singapore currency strategist Patrick Bennett said New Zealand interest rates remained too attractive to stop Japanese investors from buying Kiwi bonds, whatever the economic fundamentals in New Zealand.

"Everybody knows the economy is slowing, but interest rates are still strong," he said. "The Bank of Japan are not about to raise interest rates, so Japanese retail investors are still happy to be in there."

The rumoured cancellation of the $600 million uridashi has not been confirmed. AMP Capital Investments bond portfolio investment manager Grant Hassell said any cancellation probably had more to do with the chaos on the Tokyo Stock Exchange the day before rather than anything officials might have said.

ANZ head of market economics Cameron Bagrie said warnings from the Reserve Bank and Treasury might have some effect if Japanese officials took the warnings on board and passed them on.

"I would be very surprised if the warnings had not gone out from the Bank of Japan to all their contacts in the private sector regarding these sorts of investments."

Local dealers attributed brisk activity in the kiwi market yesterday by Japanese forex traders to the uridashi rumour, and also a heightened sense of risk following a huge dive on the Tokyo Stock Exchange on Wednesday.

Against the yen, the kiwi closed at 78.76 compared with 79.57 yen at Wednesday's local close. The kiwi slumped to a two-week low of 68.25USc yesterday before closing at 68.30USc.