A Month on, BOJ's Tweaks Prove Too Little for Moribund Bonds

(Bloomberg) -- Japan’s benchmark bonds recorded no trades on Wednesday, less than a month after the central bank sought to enliven the world’s second-biggest debt market by relaxing yield control.

That’s the seventh instance this year when the debt didn’t change hands, though the first since July 31 when the Bank of Japan said it will allow the 10-year yield to deviate by as much as 0.2 percentage points around zero percent. The yield rose one basis point early Thursday to 0.105 percent.

While Hitoshi Suzuki, a BOJ board member, said Wednesday the central bank still needs more time to decide if the policy tweak -- the first since yield-curve control was introduced almost two years ago -- is sufficient, consensus has emerged among regional banks and insurance companies that more needs to be done as trading returns to abysmal levels.

“There are few trading incentives,” said Eiichiro Miura, general manager of the fixed-income investment department at Nissay Asset Management Corp. in Tokyo. “The market is still trying to figure out the real intention of the BOJ’s policy tweaks as the central bank hasn’t taken any action since it changed its policy.”

The BOJ has maintained bond-purchase amounts at its regular operations over the past month, including one on Wednesday, amid calls by investors for it to cut back. The 10-year yield had closed at 0.095 percent for five straight days through Tuesday.

Friday Speculation

Volatility returned briefly to Japan’s bond market after the BOJ’s policy decision, as traders seeking to test the new boundaries for the 10-year yield pushed the benchmark to an 18-month high of 0.145 percent on August 2. It has since fallen amid the realization that the BOJ’s reluctance to alter either its bond-purchase plan or the yield target indicates little has changed.

The central bank maintained the guidance to expand its JGB holdings by 80 trillion yen ($716 billion) a year, a key pillar of its ultra-loose policy that has crushed trading volumes in the market. It’s set to announce the buying plan for September on Friday.

“Nervousness prevails in the market ahead of Friday’s announcement of the BOJ’s purchase plan for September and the 10-year bond auction next week,” said Miura. “That also has taken the energy out from the market.”

Forty-year JGBs recorded their first trade in a week on Thursday, according to Japan Bond Trading Co. Meanwhile, two-year debt changed hands on Thursday for the first time since Aug. 24 and five-year bonds traded for the first time since Monday.

The sluggish market has increased speculation for a cut in outright bond purchases and some additional policy measures, Katsutoshi Inadome, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo, wrote in a report.

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