Japanese bonds down for two consecutive days on firm risk appetite

The Japanese long-term government debt instrument slumped on Thursday for two consecutive days, as investors cooled on safe-haven assets amid gains in riskier assets including stocks and oil. The yield on the benchmark 10-year, which moves inversely to its price, moved higher 14.55 pct to -0.094 pct and 2-year bonds yield climbed 5.73 pct to -0.247 pct by 0630 GMT.

The benchmark Nikkei 225 rose to 11-1/2 weeks high on sliding Japanese yen (lowest since April 6) after Bloomberg reported that Bank of Japan (BoJ) is discussing to apply negative rates on excess reserves and growing consensus of further policy easing from the BoJ. The Japanese Nikkei 225 closes up 1.2% at 17,572.49.

There has been report in the financial media today that Bank of Japan (BOJ) may be considering charging negative interest rates on loans, which effectively means, BOJ will be handing out money to banks and pay them to lend to the economy. This is similar to recently launched European Central Bank’s (ECB) TLTROs, where negative rates will be charged to the banks, where it may go down to -0.4%.

On the other hand, investors did not react to the weak February tertiary industry index, which fell 0.1 m/m, against market expectation was for fall of 0.5%, from up 1.5% in January and April Nikkei flash manufacturing PMI, which decline to 48, lower than the investors anticipation of 49.5, from 49.1 in March.

On the other hand, the Bank of Japan (BoJ) Governor Kuroda in its recent comments said that Japan's economy has continued moderate recovery trend and price trend is surely improving, he expect CPI to hit 2% around first half of next year. Said impact of negative rates to spread to economy and will not hesitate to add stimulus, if needed. Further he said at G20 meeting in Washington that BOJ won't hesitate to take additional easing steps if needed to hit price target and negative rate policy and QQE is to achieve inflation target at earliest date possible.

The Japanese government bonds have been closely following developments in oil markets because of their impact on inflation expectations and stock market sentiments, which are well below the Bank of Japan's target. Yesterday, Crude oil prices jumped as Energy Information Administration's (EIA) showed that crude stock rose lower than the market expectation last week. The crude inventories rose 2.1 million barrels, from prior build of +6.6 million barrels for the week ending 15 April. This came alongside a decreases seen in gasoline inventories of -0.1million barrel, from prior -4.2 million barrel and distillate inventories of -3.6 million barrel, as compared to a build of +0.5 million barrel seen prior. Moreover, Market speculation that Petroleum Exporting Countries (OPEC) and Russia will meet in Moscow next month to again strike a deal on oil output freeze, boosted crude oil investors confidence. But, Russian Energy Minister Alexander Novak denied about any such meeting happening in Russia in May. On Sunday, the negotiations between Petroleum Exporting Countries (OPEC) and Russia failed to reach an agreement in the Doha round of talks to strike a deal on oil output freeze. The International benchmark for crude oil prices, Brent futures rose 1.26 pct to $45.10, while West Texas Intermediate crude oil jumped 1.41 pct to $43.79 by 0630 GMT.

According to recent Reuters poll, out of 16 analysts 8 said that the BOJ will take easing steps at 27-28 April meeting, 3 expected in June and 5 said in July. Apart from this, 10 analysts were confident to say that the BOJ will adopt a combination of cutting rates deeper into negative territory and boosting asset purchases.

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.

Lastly, the Bank of Japan will hold its two day monetary policy meeting on 27-28 April. The BoJ's 9-member policy board is expected to decide policy rate and update forecasts inflation and growth figures.