Japanese bonds ease following comments from BoJ’s Deputy Governor Nakaso

The Japanese government bond erased previous gains Thursday following comments from BoJ’s Deputy Governor Hiroshi Nakaso. Also, investors demand for safe-haven assets remained subdued as the economy grew faster in the second quarter than initially estimated.

The benchmark 10-year bond yield, which moves inversely to its price, rose more than 1/2 basis point to -0.043 percent, the yield on 6-year note jumped 1-1/2 basis points to -0.171 percent, the super-long 30-year JGB yield dipped 1/2 basis point to 0.419 percent and the short-term 2-year JGB yield remained steady at -0.194 percent by 06:30 GMT.

The BOJ Deputy Governor Nakaso said that Japan's economy is no longer in deflation and if necessary the central bank will decide in what way current framework should be adjusted. He said inflation expectations have stalled due to oil price falls and weakness in demand following sales tax hike.

He further added that there is no plan to abandon 2 percent price target and the BOJ will not conduct policy to affect foreign exchange. He further mentioned that he does not see big meaning of debating whether to ditch BoJ's 2-year time frame for hitting inflation goal.

Furthermore, BOJ deputy governor Nakaso said that reducing monetary policy accommodation is not on the agenda and next policy meeting will discuss what needs to be done to achieve 2 percent price target at an earliest possible time. He said the central bank will take measures and judge necessary for Japan's economy, depending on economic and price developments further measures must still be deemed necessary.

In addition, Japan second quarter final (seasonally adjusted) gross domestic product (GDP) rose 0.2 percent q/q, market consensus was for a steady growth. Additionally, annualised GDP (seasonally adjusted) for Q2 increased 0.7 percent, higher than the market expectation of 0.2 percent growth.

The higher growth numbers have reduced the probability of further BOJ easing in the upcoming two-day policy meeting, but do note that inflation is still way below target. The next Bank of Japan meeting is September 20 and 21, our bias is for a 10 basis points rate cut.

The Bank of Japan will hold its two-day monetary policy meeting on 20-21 September, announcing its decision on Wednesday, 21 September is a close call. But, we foresee that the BoJ's 9-member policy board is likely to cut rates on excess reserves and expand its monetary base as stagnant growth and continued risk of deflation will weigh on BoJ Governor Kuroda’s decision.

According to recent Reuters poll, 60 percent of economists see the Bank of Japan easing in September 21; 40 percent see them stay unchanged. Pollsters are split on possible policy action and over 50 percent said the BoJ will adopt more flexible wording on inflation targeting.

Meanwhile, the benchmark Nikkei 225 closed down 0.32 percent at 16,958.77 and the broader Topix index also closed 0.27 percent lower to 1,345.95 points.