Salient to Investors:

Bank of America Merrill Lynch and Mizuho Securities say the bubble forming in the Japanese government bond market risks further expansion as central bank purchases shield the notes from a global rout.

Benchmark 10-year JGB yields were the lowest in the world at 0.67 percent versus 2.65 percent for similar-maturity US Treasuries.

Bank of America forecasts 10-year JGB yields will fall to as low as 0.5 percent in half1 2014, and Tokai Tokyo (8616) Securities says they may touch a record low of 0.25 percent.

Shuichi Ohsaki at Bank of America said JGBs are in the midst of a bubble and because yields are suppressed by the BOJ’s powerful easing, they may climb when the stimulus is removed. Ohsaki is bullish on the Japanese economy and expects the BOJ to end its zero rate policy around mid-2016.

Most analysts expect the BOJ to add to easing in half1 2014.

Koichi Kurose at Resona Bank said the current yield levels will continue to be justified by abnormal monetary policy taken in response to the abnormal situation.

Bank of America forecasts the yield will range from 0.5 percent to 1.15 percent in the fiscal year starting April 1. Tokai Tokyo sees an even chance that the yield will touch 0.25 percent during the period.

Kazuhiko Sano at Tokai Tokyo said Japan’s growth potential will continue to deteriorate, so it is no surprise that yields are where they are at, and we will only know it’s a bubble after it bursts.

Tetsuya Miura at Mizuho Securities said bond yields are not consistent with stock prices, and either Japan will end deflation, the economy expands on a nominal basis, and tax revenue increases, or Japan will remain in deflation and fiscal risk premiums will rise.

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