Japanese bonds climb on weak inflation expectation

The Japanese long-term debt rallied on Monday as Japan inflation expectations weaken after Japan firms slash inflation forecasts amid lower oil prices, putting more pressure on policy-makers to unleash another round of stimulus in the upcoming policy meet. The benchmark 10 year bond yields fell 9.52 pct to -0.069 pct and 3-year bonds yield dipped 0.89 pct to -0.227 pct at 6:40 GMT.

The JGB prices remain higher, with the 5s/20s curve flattening by 1bp from last Friday. The results of today's JGB buying operations, which the BoJ published around noon, hinted at tight demand and supply conditions in the JGB market.

Today, the BoJ bought JPY790bn of JGBs in the 1-year to 5-year zone and JPY 400bn of JGBs in the 10-year to 40-year zone. After lunch, JGBs extended their earlier gains modestly ahead of tomorrow's monthly JPY2.4tn 10-yr JGB auction. Under current market circumstances, the MoF is likely to re-open the current issue. The payment date is set for Apr 7, the regular settlement date (T+2). JGB players, therefore, don't need to adjust yields between the current issue and the new one.

Japanese companies expect consumer prices to be 0.8 pct higher in one year's time, the Bank of Japan said Monday, down from a 1.0 pct rise predicted for the year ahead in December. The forecasts, which came as crude oil prices continued to decline, remain far from the central bank's 2 pct inflation target.

Moreover, the BoJ's adoption of negative rates in January has driven JGB yields below zero, while also increasing its market volatility.

We expect an expansion of stimulus, and if the market happens to rule out any additional boost in stimulus, that would create an opportunity to go long and we also foresee that the 10-year note will yield about -0.15 percent at year-end.

But the JGB market would be extremely fragile, once Japan's CPI rises more than 2% on a year-over-year basis in the near future. At that time, the BoJ would be the most vulnerable victim as the largest holder of JGBs as the central bank has promised that they will continue to buy JGBs even at deep negative yields.