JGBs slip tracking losses in U.S. Treasuries; Kuroda’s hawkish comments support yields

The Japanese government bonds slumped Thursday as markets followed an overnight retreat by U.S. Treasuries. Also, investors moved away from safe-haven buying after Bank of Japan’s Governor Haruhiko Kuroda made hawkish comments in the Parliament.

The benchmark 10-year bond yield, which moves inversely to its price, rose 1 basis point to -0.054 percent, the yield on long-term 30-year Treasury jumped nearly 2 basis points to 0.496 percent and the yield on short-term 2-year note climbed 1 basis point to -0.245 percent by 06:00 GMT.

BoJ’s Governor Kuroda said that he does not see an immediate need to change short and long-term rate target levels. He said that there is absolutely no plan to reduce BoJ's JGB holdings now and Japan's yield curve is moving in line with shape, considered desirable at the previous policy meeting. He said the 10-year JGB yields are moving in line with BoJ's target of around 0 percent and there are still plenty of JGBs in the market for BoJ to buy; JGB buying operations have been extremely smooth so far.

Further, he said that it is possible to run out of JGBs to buy over very long term. However, he does not anticipate any such problem in the near term. He also said that the CB cannot buy foreign bonds under current BOJ regulations.

We foresee that the BOJ is expected to maintain its minus 0.1 percent short-term interest rate target at its two-day meeting ending on Tuesday, next week. In September, the BOJ shifted the focus of its monetary policy framework to controlling the yield curve by actively guiding the 10-year yield around zero.

Moreover, the JGBs have been closely following developments in oil markets because of their impact on inflation expectations, which is well below the Bank of Japan's target. Crude oil prices recovered in the Asian session from previous losses on fresh buying and concerns over Venezuela's stability. The International benchmark Brent futures rose 0.30 percent to $50.14 and West Texas Intermediate (WTI) jumped 0.22 percent to $49.29 by 06:30 GMT.

According to a Bloomberg survey of economists showed majority expect no change from the bank at this meeting. Around 35 percent think that Kuroda's BOJ is done with adding to stimulus. Only 2 of the 43 respondents looking for more easing at the meeting, both forecast a cut in the negative interest rate on some commercial bank reserves to -0.2 percent.

Lastly, investors will remain keen to focus on the series of upcoming economic data, highlighted by household spending, National CPI, unemployment rate, BoJ’s own CPI number and 10-year bond auction.

Meanwhile, the benchmark Nikkei 225 closed down 0.32 percent at 17,336.92 and the broader Topix index closed 0.05 percent lower to 1,382.01 points.