Japanese Bonds Rise Modestly on Weak Crude Oil
The Japanese government bonds gained modestly on Monday on tracking weak cues emerging from crude oil futures. The yield on the benchmark 10-year bonds fell 1bp to -0.100 pct and the yield on short-term 2-year bonds also dipped 1bp to -0.233 pct by 0545 GMT.
The Japanese bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Japan's target. Today, crude oil prices fell on firm global supply, a stronger dollar and surging output from Iran to Europe and Asia. Moreover, Iranian deputy oil minister quoted that Iran plans to increase oil export capacity to 2.2 million barrels by the summer and has no plans to freeze its level of oil production and export. The International benchmark Brent futures fell 0.72 pct to $49.16 and West Texas Intermediate (WTI) dipped 1.08 pct to $48.68 by 0540 GMT.
According to latest Reuters report, the BoJ is widely expected to buy JPY450 billion of JGBs in the 5-10 year zone and JPY70 billion of JGBs maturing within one year under its massive JGB purchase program. As far as super-long JGBs are concerned, the central bank is unlikely to buy them until Friday, as the MoF re-opens the current 40-year JGBs on Thursday. Relatively stable overseas bond markets last Friday have some positive impact on JGBs despite growing expectations for another rate hike by the Fed.
On Friday, the Bank of Japan Governor Kuroda said that negative rates having a positive effect on the economy and will add easing without hesitation if needed. Said the BOJ policy is for domestic purposes and global economy likely to recover moderately. The QQE with negative rates is likely to have a positive effect on the economy over time, he added. The yen’s surged to around 10 pct since January after the BoJ lowered its policy rate to -10 pct, while rising yen hurts Japanese exporters and puts downward pressure on import prices, which holds down inflation. There were bets that the BOJ might announce additional easing measures, such as increasing the size of its asset-purchase program, or dropping interest rates deeper into negative territory, which would have weakened the currency.
The Japanese May seasonally adjusted trade balance jumped to USD 823.5 billion against market expectation of USD 540 billion. The increased surplus is due to a larger than expected decline in imports by 23.3% y/y compared to -19.2% previously. The exports were also lower at -10.1% compared to -9.9% in April. The adjusted figures also showed a larger surplus of USD 426.6 billion vs USD 274 billion estimated. The prior month surplus was revised higher to USD 295.3 billion from USD 276.5 billion.
The BoJ's adoption of negative rates in January has driven JGB yields below zero, while also increasing its market volatility. Further, we expect an expansion of stimulus, and if the market happens to rule out any additional boost in stimulus, that would create an opportunity to go long and we also foresee that the 10-year note will yield about -0.15 pct at year-end.
The markets will now focus on April National CPI on Thursday (2330 GMT) and BoJ’s own core CPI figure on Friday (0500 GMT). Meanwhile, the benchmark Nikkei 225 index was trading down 0.56% at 16,642.18, and the broader Topix index inched lower 0.45 pct to 1,337.18 points by 0550 GMT.
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