Short-term Japanese bonds slump ahead of BoJ policy announcement, CPI data eyed

The short-term Japanese government bonds slumped on Thursday as investors awaited the result of the two-day monetary policy meeting of the Bank of Japan on July 28-29. Also, the release of June consumer inflation change will remain in focus.

The benchmark 10-year bond yield, which moves inversely to its price, rose more than 2 basis points to -0.269 percent, the yield on 5-year note jumped 2-1/2 basis points to -0.346 percent (recovered from record low levels), the yield on super long 30-year note dipped 1 basis point to 0.260 percent and the short-term 2-year JGB yield also bounced 2 basis points to -0.344 percent (rebounded from record low) by 07:10 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 Shinzo Abe announced for 28 trillion yen in economic stimulus and said 13 trillion yen of it will be for "fiscal measures". On the other hand, he did not indicate how much of it would be new spending. He said that he will announce further details next week.

In addition, recent economic developments in Japan are, however, continuing to place pressure on the BoJ to deliver further monetary easing ahead of the elections in the summer. Japan May headline CPI fell 0.4 percent y/y, against the market consensus of -0.5 percent, from down -0.3 percent.

Similarly, National CPI y/y excluding fresh food for May fell -0.4 percent y/y, against market expectation -0.4 percent, compared to -0.3 percent in April. Similarly, the BoJ's own May national CPI ex-fresh food & energy rose 0.8 percent y/y, in the line of consensus, but lower than the previous reading of 0.9 percent in April.

Lastly, investors will remain keen to focus on the June 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 down -1.13 percent at 16,476.84, and the broader Topix index closed lower 1.11 percent to 1,307 points.