Long-term JGBs gain on hopes of BoJ easing, crude oil prices fall

14 September 2016, 01:31
Eko Rediantoro

The long-term Japanese bond gained Tuesday as investors speculate that the Bank of Japan will lower its key interest rate further into negative territory. Also, weak crude oil prices drove traders towards safe-haven buying.

The benchmark 10-year bond yield, which moves inversely to its price, fell nearly 1 basis point to -0.015 percent, the super-long 30-year JGB yield dipped 2-1/2 basis points to 0.520 percent and the 20-year JGB yield slid 2 basis points to 0.445 percent by 06:10 GMT.

The Bank of Japan will hold its two-day monetary policy meeting on 20-21 September, announcing its decision on Wednesday, 21 September is a close call. But, we foresee that the BoJs 9-member policy board is likely to cut rates on excess reserves and expand its monetary base as stagnant growth and continued risk of deflation will weigh on BoJ Governor Kuroda’s decision.

According to recent Reuters poll, 60 percent of economists see the Bank of Japan easing in September 21; 40 percent see them stay unchanged. Pollsters are split on possible policy action and over 50 percent said the BoJ will adopt more flexible wording on inflation targeting.

The BoJ is considering options to steepen the JGB yield curve, including adjusting its bond purchases or clarifying forward guidance on policy, they added.

Moreover, 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 Japans target. Crude oil prices fell after a number of rigs digging for oil in the US rose again last week. The International benchmark Brent futures fell 0.64 percent to $48.00 and West Texas Intermediate (WTI) dipped 0.91 percent to $45.87 by 06:10 GMT.

Last week’s, Japan’s second quarter (final) seasonally adjusted GDP rose 0.2 percent q/q (consensus was for zero), which is an upward revision from the previous reading of 0.0 percent, though down from 0.5 percent in the first quarter of 2016.

On an annualised basis growth was 0.7 percent y/y, higher than the market expectations of 0.2 percent y/y growth, from previous 0.8 percent. The better GDP somewhat reduces the probability of further BOJ easing measures, but do note that inflation is still way below target. The next Bank of Japan meeting is September 20-21; our bias is for a 10 basis point rate cut.

Meanwhile, the benchmark Nikkei 225 closed up 0.34 percent at 16,729.04 and the broader Topix index also closed 0.01 percent lower to 1,322.99 points.

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