Japanese bonds gain after BoJ keeps policy rate steady, signals easing bias

The Japanese government bonds gained Thursday after the Bank of Japan (BoJ) kept its policy rate unchanged at record low of -0.1 percent, as expected and signalled room for easing.

Also, demand for fixed income securities increased after the Federal Open Market Committee (FOMC) kept its benchmark lending rate unchanged and lowered its economic growth expectations and rate path outlook.

The yield on the benchmark 10-year bonds, which moves inversely to its price fell to all-time low of -0.194 percent, yield on super-long 30-year bonds dipped nearly 5 basis points to 0.168 percent, yield on 15-year bonds tumbled more than 1-1/2 basis points to a record low of -0.040 percent (dip below zero for the first time on Tuesday) and the 20-year JGB yield fell to a record low of 0.115 percent, down more than 3 basis points by 07:25 GMT.

Following the global debt market, the benchmark 10-Year US Treasury yield dipped to four-month low at 1.541 percent, down 5 basis points and the Australian 10-year Treasury note yield fell nearly 6 basis points to 2.014 percent.German 10-year bond yields hit a new record low of minus 0.034 percent.

The Bank of Japan left its key policy rate unchanged at -0.1 percent and also chosen not to expand its quantitative and qualitative easing programme beyond its current level of buying 80 trillion yen assets a year.

This policy decision on negative interest rate was made by 7-2 votes and on debt buying by 8-1 votes. On the contrary, board member Takahide Kiuchi and Takehiro Sato voted against keeping the policy rate in negative territory and Takahide Kiuchi also proposed tapering annual JGB purchases to 45 trillion yen, which was turned down by a majority vote.

The Central Bank said in its monetary statement that Japan's economy continues to recover moderately as a trend, while keeping assessment unchanged from April. They further added that CPI likely to be slightly negative or about 0 percent for time being due to weak energy prices. But the central bank stuck to its long-term forecast that inflation will accelerate toward 2 percent after some weakness, and left its relatively optimistic assessment of Japan’s economy unchanged as well.

Moreover, the Federal Open Market Committee left fed funds rate unchanged in a 0.25-0.50% range, as expected. One key highlight of the statement was the note that the pace of improvement in the labour market has slowed while growth in economic activity appears to have picked up, adding that although the unemployment rate has declined, job gains have diminished. Also, FOMC diminished outlook for growth coupled with largely downgraded forecasts for the overnight rate, though median expectations remain unchanged for 50 basis points worth of tightening in 2016.

Moreover, the JGBs have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Japan's target. Today, crude oil tumbled more than 1 percent for six straight days, dragged by a somewhat disappointing U.S. oil data and looming risk of Britain’s departure from the European Union. The American Petroleum Institute (API) showed U.S. crude inventories rose by 1.2 million barrels in the week to June 10 to 536.7 million, against market consensus for a decrease of 2.3 million barrels. The International benchmark Brent futures fell 1.08 percent to $48.44 and West Texas Intermediate (WTI) dipped 1 percent to $47.53 by 07:25 GMT.

Meanwhile, the yen rose more than 1 percent against the USD to hit a 20-month high after the BOJ left monetary policy settings unchanged. The benchmark Nikkei 225 index closed down -3.05 percent at 15,434.14, and the broader Topix index closed lower 2.78 percent to 1,241.56 points.