JGB yields following a downward trend, but BOJ operating itself

While rise in volatility due to low liquidity is becoming a risk for the JGB market, as long as central banks are buying government bonds in large quantities, yields will probably be vulnerable to downward pressure. However, investors will inevitably become more cautious, since a sharp rise in volatility is well within the realm of possibility.

"Failure of BOJ operation is a possible risk. Inflation is forecasted at 0.6% for FY2015 and 1.4% for FY2016, and inflation is not expected to stabilize at 2% any earlier than 2017. If the BOJ maintains its current monetary policy until 2017, it will raise the risk of its buying operations failing", says RBC Capital Markets.

A further expansion of QQE by the BOJ is also a risk that would probably push volatility higher. If the inflation rate does not recover from the fall, it would raise thelikelihood of another expansion of QQE. 

"It may be difficult for the BOJ to increase the quantity of JGBs it purchases, but even if it does, it would be a source of volatility", added RBC capital markets.