Japanese bonds strengthen as Fed Sep rate hike fades; Q2 GDP in focus

The Japanese government bond strengthened Wednesday as the United States Federal Reserve September rate hike faded after weaker than expected ISM non-manufacturing reading.

The benchmark 10-year bond yield, which moves inversely to its price, fell more than 2 basis points to -0.039 percent, the super-long 30-year JGB yield dipped 4 basis points to 0.463 percent and the short-term 2-year JGB yield slid 1 basis point to -0.192 percent by 06:50 GMT.

The August ISM estimate of United States national non-manufacturing conditions revealed downward pressure in the composite index reading to 51.4 (lowest since January 2010), versus the unrevised 55.5 reading that occurred in July. This comes in below market expectations for a 55.0 result.

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.

Lastly, investors will remain keen to focus on the Wednesday’s second-quarter gross domestic product (GDP), which is expected to remain flat quarterly as well as annually. This may pressurise the BoJ further for cutting the key interest rate in negative territory. Looking ahead, we believe a 10 basis point cut is likely to be the case in this situation.

Meanwhile, the benchmark Nikkei 225 closed down 0.41 percent at 17,012.44 and the broader Topix index also closed 0.23 percent lower to 1,349.53 points.