Japanese bonds slump after stocks soar on hopes of fresh stimulus

The Japanese government bonds slumped as stocks continue to gain for a second straight day on Tuesday due to weaker yen and expectations for fiscal stimulus.

The yield on the benchmark 10-year bonds, which moves inversely to its price rose nearly 2 basis points to -0.254, short-term 2-year JGB yield jumped 1/2 basis point to -0.343 percent, super-long 40-year bonds bounced more than 3 basis points to 0.156 percent and the yield on 20-year JGB also climbed more than 3 basis points to 0.091 percent by 06:20 GMT.

The Japanese Prime Minister Shinzō Abe confirmed that he will instruct economy minister Nobuteru Ishihara to compile an economy stimulus package and will implement economic measures to support domestic demand. He said would take economic steps to encourage future investment and will issue construction bonds to fund a stimulus package, for the first time in 4 years.

He further added that global economy faces various risks and must strengthen global co-ordination to address uncertainty and support world growth. Lastly, he added that would accelerate exit from deflation as much as possible and would consider the scale of economic measures from here on.

Moreover, the Japan economy minister Ishihara said that he is conscious of Brexit fallout in stimulus spending and people still do not think Japan has fully escaped the risk of deflation. He further added that stimulus spending must ensure Japan maintains enough speed to escape deflation.

Additionally, the Japan's upper house election over the weekend concluded with a win for Prime Minister Shinzō Abe and his coalition partners. The winning team might have scored big enough to have a 2/3 'super majority' in the upper house. If they do get this, it will make constitutional reform much easier for Abe.

In terms of data, investors did not react to the weak June producer price index figure, which fell 0.1 percent m/m, which was in the line of market expectations for -0.1 percent, as compared to 0.1 percent, revised from +0.2 percent in May. It also fell 4.2 percent y/y, similar to the investor’s consensus for -4.2 percent, from prior -4.3 percent, revised from -4.2 percent.

Similarly, Japan tertiary industry index tumbled -0.7 percent m/m in May, in the line of market consensus of -0.7 percent m/m, as compared to previous +0.7 percent revised down from +1.4 percent in April.

Meanwhile, the benchmark Nikkei 225 index closed higher 2.49 percent at 16,095.65 and the broader Topix index closed up 2.38 percent to 1,285.73 points.