JGBs gain on dovish Kuroda’s remark

The Japanese government bonds gained on Friday after Bank of Japan Governor Kuroda said that the central bank would not hesitate easing monetary policy further if market moves, including a spike in the yen, threatened prospects for achieving its 2 pct inflation target. On the contrary, future course in bond prices are likely to be ruled by the movements in the crude oil market. The yield on the benchmark 10-year bonds fell 2bps to -0.091 pct, yield on 30-years bonds dipped 2bps to 0.337 pct and the yield on short-term 2-year bonds hovered at -0.225 pct by 0617 GMT.

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, 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.

On Wednesday, the Japan (world’s third largest economy) witnessed a jump in its Q1 growth figures, beating analysts’ expectations. However, few believe that the rebound is not strong enough to generate hopes of revival of the crawling economy. The Japanese Q1 gross domestic product grew by 1.7 pct at an annualized seasonally adjusted rate, against market hopes of a nominal 0.3 pct and compared to -1.1 pct in the previous quarter. In line with this, non-annualized GDP (seasonally adjusted) grew 0.4 pct, against analysts’ expectations of 0.1% and -.04% compared to last quarter. Minutes after the GDP data was released, analysts have judged the high-than-expected figures as nominal, hoping the Kuroda-led central bank to ease policy in June, against a backdrop of poor economic conditions and weak inflation. However, the first quarter economic growth report does not alter the projection of additional easing by the Bank of Japan, said Nordea Bank in a research report.

“We continue to expect the central bank to cut the rate on excess reserves by 20bp to -0.30% on 16 June”, added Nordea Bank.

Furthermore, the economic growth figures are unlikely to reduce speculations regarding additional fiscal stimulus such as further delay of the sales-tax hike intended for 2017, noted Nordea Bank.

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 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. The International benchmark Brent futures rose 0.72 pct to $49.16 and West Texas Intermediate (WTI) climbed 1.08 pct to $48.68 by 0540 GMT. The benchmark Nikkei 225 index closed up +0.54% at 16,736.35, and the broader Topix index closed higher 0.51 pct to 1,343.40 points.