Japanese bonds gain as investors cover previous short positions ahead of BoJ policy decision

The Japanese government bonds gained Tuesday as investors covered previous short positions following strong demand from the Bank of Japan’s bond-buying operation. Also, traders remained cautious ahead of the Bank of Japan monetary policy decision scheduled to be released on Wednesday.

The benchmark 10-year bond yield, which moves inversely to its price, fell nearly 2 basis points to -0.052 percent, the super-long 30-year note yield dipped 5-1/2 basis points to 0.513 percent and the short-term 2-year JGB yield slid ½ basis point to -0.264 percent by 06:10 GMT.

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.

Moreover, various articles published yesterday pointed to the higher probability that the Japanese central bank will lower its key policy rate by about 10-20 basis points. According to Nikkei daily paper and Reuters, the BoJ will cut its interest rate deeper into negative territory.

Although other news articles, including one from Bloomberg, affirms that there are a variety of different opinions on the board and Governor Haruhiko Kuroda and his delegates reportedly prefer a rate move to expanding quantitative easing, which is thought to be reaching its limit. Therefore, this backs our expectation that the marginal deposit rate will be trimmed next Wednesday.

According to Reuters, the results of the BOJ's buying of 750 billion yen JGBs, including 12 billion yen in maturities of 25 years or longer, also showed limited selling pressure.

Meanwhile, the benchmark Nikkei 225 closed down 0.16 percent at 16,492.15 and the broader Topix index closed 0.42 percent higher to 1,316.97 points.