Japanese bond yields climb as crude oil hits 2016 high

The Japanese government bonds were trading weak on Wednesday amid tracking strong cues emerging from crude oil prices. The Japanese bonds have been closely following developments in oil markets because of their impact on inflation expectations. The benchmark 10-year bonds yield, which is inversely proportional to bond price rose 38.54 pct to -0.059 pct and 3-year bonds yield jumped 5.75 pct to -0.246 pct 0635 GMT.

Today, crude oil prices rose by tracking weak greenback and strong investor sentiment. Meanwhile, Crude oil prices continue to rover near to 2015 high. WTI was further supported after the American Petroleum Institute (API) reported a draw of almost 1.1 million barrels in U.S. crude inventories a week ago versus markets desires for a 2.4 million-barrel build in a Reuters survey. The International benchmark Brent futures rose 1.16 pct to $46.12 and West Texas Intermediate (WTI) climbed 1.04 pct to $44.50 by 0635 GMT.

"A weaker U.S. dollar and expectations of stronger fundamentals drove crude oil prices higher. Sentiment continues to improve, with major producer BP suggesting the markets may rebalance by the end of the year," said ANZ in a note.

On the other hand, the Bank of Japan will hold its two day monetary policy meeting on 27-28 April. We foresee that the Bank of Japan will cut its monetary policy rate by 10bp to -0.2 pct and also increase its current qualitative measures such as EFTs and Real estate investment trusts (J-REIT) from current levels of 3 trillion and 90 billion Japanese yen, respectively. The BoJ's 9-member policy board is also expected to decide policy rate and update forecasts inflation and growth figures.

The Bank of Japan Governor Kuroda said that the impact of negative rates on banks overall is very limited and the BoJ is investigating economic effects of recent earthquakes. Said negative rates won't cause quake donations to shrink and 3-tier system applied for negative rate policy means most Japanese banks receive interest for their accounts at BoJ.

According to recent Bloomberg survey, 23 of 41 analysts (56%) expect the BoJ to expand stimulus at its meeting on 27-28 April. 19 predict an increase of ETF purchases and 8 foresee a cut in negative interest rates. 90% of the respondents foresee more easing at least by July. Apart from this, we expect that the BOJ will adopt a combination of cutting rates deeper into negative territory and boosting asset purchases.

On the other hand, Bloomberg reported on its website on Thursday that the Bank of Japan is considering expanding its negative rate policy to bank loans and could cut rates further. The move would provide relief to financial institutions by reduce the pressure the negative rates are putting on the banking sector. It would also effectively provide scope to further lower the deposit rate.

"This suggests that the BOJ might not increase its bond buying amount if it does ease, and investors with positions centred in the 20-year zone are taking the opportunity to sell them," said a dealer at a foreign brokerage in Tokyo to Reuters.

Moreover, 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.