Japanese bonds gain on BoJ easing hopes

The Japanese government bonds gained on Wednesday as investors speculate that the Bank of Japan will lower its key interest rate further into negative territory with higher asset purchase programme.

The yield on the benchmark 10-year bonds, which moves inversely to its price, fell more than 3 basis points to -0.281 percent, the yield on 5-year note dipped nearly 3 basis points to -0.366 percent (hits record low) and the short-term 2-year JGB yield also dipped 3 basis points to -0.357 percent (touched record low) by 07:00 GMT.

The central bank is expected to ease interest rates at its monetary policy meeting scheduled for July 29 as stagnant growth and continued risk of deflation will weigh on BoJ Governor Kuroda’s decision.

According to a Bloomberg poll, 78 percent of analysts expect that the Bank of Japan will expand easing this week. Bloomberg's survey was conducted during July 15-22 which found 32 of 41 analysts forecast the BoJ will expand their stimulus program.

Moreover, an increase in purchases of exchange-traded funds remains the most likely area for a boost, followed by a deeper cut in the negative interest rate applied to a portion of the money that commercial banks deposit at the BoJ.

Looking ahead, we expect an expansion of the central bank's asset purchase programme to 85 trillion yen annually, which includes scaling up of ETF and J-REIT. Also, the BoJ is expected to witness a 10 basis points cut in its marginal deposit rate to -0.2 percent.

Japan Prime Minister Shinzō Abe will announce an economic stimulus package next week in excess of 28 trillion yen. Further, JPY 13 trillion will be on fiscal measures, Reuters reported. Also, Japan Ministry of Finance official said to Reuters that government is not considering issuing 50-year bonds for the stimulus package.

In addition, 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. Crude oil prices continue to trade lower due to sluggish global demand and supply glut. The International benchmark Brent futures fell 0.53 percent to $44.99 and West Texas Intermediate (WTI) tumbled 0.51 percent to $42.70 by 07:00 GMT.

Lastly, investors will remain keen to focus on the CPI data, industrial production, retail sales on Thursday at 23:30 GMT and BoJ policy decision on Friday.

Meanwhile, the benchmark Nikkei 225 index closed up +1.72 percent at 16,664.82, and the broader Topix index closed higher 1.13 percent to 1,321.67 points.