Japanese Government Bonds flat as scandal roils Japan politics

Asian Stock Markets

Japanese government bond prices were unchanged on Monday as the market took a wait-and-watch stance after Prime Minister Shinzo Abe and finance minister Taro Aso came under increased fire over a suspected cronyism scandal. 

Market focus was on how the suspicions of a cover-up could eventually affect Abe’s support base and his hopes of extending his stay in office for a third term. 

The Bank of Japan has conducted powerful monetary easing and pinned long-term JGB yields near zero percent under “Abenomics,” a set of economy-boosting steps initiated by the prime minister. 

The JGB market is currently considering two scenarios. In the first, the scandal hits Abe, shakes Abenomics and weakens the BOJ’s monetary easing, prompting bond yields to rise, said Katsutoshi Inadome, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities. 

In the second scenario, Abe emerges from the scandal with less damage. And if he survives, Abe could try to prop up his support ratings with a fresh round of monetary easing, and that would push down JGB yields.

JGBs were pressured by stronger stock prices, but this was offset by the BOJ’s regular debt-buying operation. 

The five-year and 10-year JGB yields were unchanged at minus 0.120 percent and 0.045 percent, respectively. The 30-year yield was also flat, at 0.755 percent. 

The BOJ on Monday bought 710 billion yen ($6.66 billion) of five- to 40-year JGBs as part of its regular debt-purchasing scheme. 

While the political scandal did shave part of the earlier gains, Japan’s Nikkei still managed to gain 1.65 percent, buoyed by Wall Street’s rally on Friday. ($1 = 106.6100 yen)

JGBs rebound as BOJ curbs rising yields

Asian Stock Markets

Japanese government bond prices recovered, pulling the 10-year yield off 6-1/2-month highs, after the Bank of Japan acted decisively on Friday to curb a rise in bond yields, by offering “unlimited” buying in long-term Japanese government bonds. 

The measure was the most important weapon for the BOJ to achieve its ultra-loose policy mandate -- the yield curve control (YCC) policy -- in which it aims to keep the 10-year JGB yield “around zero percent”.

The BOJ offered to buy 10-year JGBs at the yield of 0.110 percent, the same level it had offered unlimited buying twice last year.

Such buying at a specific yield level is considered the most powerful show of force in directing the market, compared with its regular bond purchases through auctions.

On top of that, the BOJ increased the amount of its planned buying through auction in five- to 10-year JGBs to 450 billion yen ($4.10 billion) from the 410 billion amount it has favoured since late August.

“Today’s operations have clarified the BOJ’s stance (to keep the 10-year JGB yield from rising above 0.110 percent.) Concerns in markets should recede for now,” Noriko Tada, senior economist at Nomura Securities.

The price of the 10-year JGB futures rose to 150.28, from the day’s low of 150.09 and up 0.08 on the day.

The benchmark 10-year cash JGB yield edged down to 0.090 percent, the same level as its previous close, from 0.095 percent touched earlier.

JGB yields have risen in recent weeks, in line with global peers, on rising expectations that the world’s central banks are increasingly leaning towards winding back stimulus as the global economy gains momentum.

Investors have started to speculate that the BOJ could also be moving towards an exit from ultra-easy monetary policy, although BOJ Governor Haruhiko Kuroda has denied that he was considering such a major adjustment in the near future.