JGBs flat in thin trade, despite dovish policymakers remark

The Japanese government bonds were trading nearly flat Thursday as investors receive no more important data or events. Moreover, the results of today's monthly JPY800 billion 30-years JGB re-opening auction were weaker than widely expected and further bond prices are likely to be ruled by the movements in the crude oil market. The yield on the benchmark 10-year bonds, which moves inversely to its price stood unchanged at -0.095 pct and the yield on the 2-year bonds remained steady at -0.241 pct by 0600 GMT.

In the earlier session today, the Japanese government bond prices slipped with yields on longer-dated maturities rising after a 30-year auction drew only lukewarm demand from investors. The benchmark 10-year yield rose 1/2bp to -0.100 pct, and the 30-year yield was up 2bps at 0.325 pct, pulling away from a record low of 0.265 pct touched last month. On the other hand, the bid-to-cover ratio, a gauge of demand, at Thursday's 800 billion yen 30-year auction slipped to 3.01 from 3.39 at the previous sale.

The former MOF official and aide to PM Abe Ito said that it is likely that the Bank of Japan (BoJ) will ease in June or July with an eye on Q1 GDP and outcome of G7 summit unthinkable for BOJ to resort to helicopter money. Said Japan unlikely to gain G7 consent for co-ordinated fiscal policy action at summit this month and whether Japan can intervene in FX market depends on whether it can convince US that yen moves are excessively volatile. The yen level, not just pace of moves, is important in deciding whether Japan intervenes in FX market, he added. On the other hand, the Bank of Governor Kuroda said that still large downside risks persist to Japan's economy and the BoJ won't hesitate to take further easing steps if necessary. Said if low rates persist for a long time, then this can cause problems and if Japan doesn't escape deflation, rates and consumption won't rise. He further added that current monetary policy is appropriate, will debate policy at each meeting and it is difficult to predict that the BOJ's JGB purchases will increase exactly at 80 trillion yen per year from here on.

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, the crude oil prices fell by the gradual return of Canadian oil sands output, reversing a sharp rise the previous day when the U.S. government detailed an unexpected fall in crude inventories. According to the US DOE, crude inventories decreased 3.4 million barrels, as compared to previous build of 2.8 million barrels for the week ending 6 May. This came alongside decreases seen in gasoline inventories of 1.2 million barrels, from prior 0.5 million barrels. The International benchmark Brent futures fell 0.17 pct to $47.51 and West Texas Intermediate (WTI) tumbled 0.11 pct to $46.18 by 0530 GMT.

The investors will pay close attention to the Friday’s Bank of Japan Governor Kuroda speech in an attempt to estimate the BoJ's likely next step to lower interest rate. In addition, the Cabinet Office will announce Q1 GDP data on Wednesday, 18th May (2350 GMT). The Japanese 2016 Q1 GDP is expected to increase 0.2 pct annualized, from down 1.1 pct in the previous quarter of 2015. Individually, Q1 private consumption, which accounts nearly 60 pct of the GDP is anticipated to increase 0.2 pct, after 0.9 pct decline in the last quarter. On the other hand, capital spending is likely to decline 0.8 pct, after rising 1.5 pct in Q4 of 2015 and external demand is expected to remain unchanged at 0.1 pct.

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. Meanwhile, the Nikkei 225 index closed up +0.41% at 16,646.34, the broader Topix index closed higher 0.22 pct to 1,337.27 points.