Japanese bonds climb on Bank of Japan’s easing expectations, Honda’s dovish remark

The Japanese bonds gained on Tuesday as investors expect further Bank of Japan (BoJ) easing in the up-coming two-day monetary policy meeting, which pushed bonds yield lower across the curve. Also, weak crude oil prices and tumbling stocks drove investors to safe assets.  The yield on the benchmark 10-year, which moves inversely to its price, moved lower 23.94 pct to -0.088 pct and 2-year bonds yield dipped 2.68 pct to -0.268 pct by 0630 GMT.

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.

On the other hand, Japan Prime Minister Abe aide Honda said that the Bank of Japan may possibly act this week and he also wants the BoJ to ease in H1 of 2016. Said that the BoJ may wait while it continues to assess the impact of its negative rates policy and stock market and the yen are moving favourably recently. Said it is better for the BoJ to act now if it wants to be pre-emptive.

Similarly, 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.

Meanwhile, the International benchmark Brent futures rose 0.18 pct to $44.41, West Texas Intermediate (WTI) climbed 0.66 pct to $42.92 and Nikkei 225 closed down -0.49% at 17,353.28 by 0635 GMT