Japanese bonds gain as weak CPI spooks BoJ to cut interest rates

The Japanese government bonds gained on Friday as consumer prices in Japan remained weak during the month of May, increasing the chances of an easing by the Bank of Japan (BoJ) in its next monetary policy meeting.

Also, JGB prices opened steady to slightly higher on expectations that the BoJ will buy JGBs today under its massive purchase program.

The yield on the benchmark 10-year bonds, which moves inversely to its price fell more than 1 basis points to -0.237 percent, short-term 2-year JGB yield dipped 1-1/2 basis points to -0.314 percent, super-long 40-year bonds tumbled more than 2 basis points to 0.143 percent and the yield on 30-year JGB slid 2-1/2 basis points to 0.117 percent by 05:45 GMT.

Japan May consumer price index fell 0.4 percent y/y, against market consensus of -0.5 percent y/y, as compared to -0.3 percent in April. Also, national CPI excluding fresh food fell 0.4 percent, against investors’ expectations of -0.4 percent, from -0.3 percent in April. This spooked that the BOJ will ease further at its July meeting. The next BOJ two-day meeting is scheduled to take place on July 28 and 29.

Moreover, the BOJ in its own calculation mentioned that May core CPI rose +0.8 percent y/y, as expected, but lower than the previous +0.9 percent.

Considering today’s economic data, Japan June Nikkei/Markit manufacturing PMI rose to 48.1, from 47.7 in May. The preliminary result stood at 47.8. The Bank of Japan Q2 Tankan large manufacturing index stood flat at 6 (consensus was for 4), from 6 in the previous quarter.

Japan May jobless rate stood flat at 3.2 percent, in the line of market consensus, from 3.2 percent in April. Also, Japan May job-to-applicant ratio rose to 1.36, marginally higher than the consensus for 1.35, from 1.34 in April. Also, May overall household spending fell 1.1 percent y/y, against investors’ expectations of -1.1 percent, from -0.4 percent in April.

In addition, Japan's public pension fund, the Government Pension Investment Fund is said to have recorded portfolio losses for the 12 months through March of between 5 trillion and 5.5 trillion yen.

On Thursday, Japanese May preliminary industrial production fell -2.3 percent m/m, higher than the market consensus of -0.2 percent fall, from up +0.5 percent in April. Also, it dipped -0.1 percent y/y against market expectations of +1.9 percent, from previous -3.3 percent.

Meanwhile, the benchmark Nikkei 225 index closed up +0.68 percent at 15,682.48, and the broader Topix index closed higher 0.69 percent to 1,254.44 points.