Japanese bonds gain on weak exports, BoJ easing expectations

The Japanese government debt instrument gained on Wednesday amid weak exports figure and expectation of further policy easing from the Bank of Japan. The yield on the benchmark 10-year, which moves inversely to its price, moved down 5 pct to -0.126 pct and 2-year bonds yield dipped 1.57 pct to 0.259 pct by 0605 GMT.

Japanese exports decline for 6th straight month, driven by weak global demand from China, United States and other Asian countries. Individually, exports to China, United States and other Asian countries fell 7.1 pct, 5.1 pct and 9.7 pct, respectively. Japan March adjusted trade balance rose to 276.5 billion, lower than the market expectation of 450 billion, from 166.1 billion in February. Overall, countries exports fell 6.8% y/y in March, against market expectation of -7% y/y, from down 4% in February, while March imports fell 14.9% y/y, from down 14.2% in February.

The Japanese bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Japan's target. Kuwaiti oil and gas labourers finished a 3-day strike that had briefly cut the OPEC crude output to half, which drag oil prices down. On Sunday, the negotiations between Petroleum Exporting Countries (OPEC) and Russia failed to reach an agreement in the Doha round of talks to strike a deal on oil output freeze. The International benchmark for crude oil prices, Brent futures fell 2.48 pct to $42.94, while West Texas Intermediate crude oil tumbled 2.82 pct to $39.92 by 0605 GMT.

"In the near term we are going to see more downward pressure than upward," said IHS analyst Victor Shum to Reuters.

On the other hand, the Bank of Japan (BoJ) Governor Kuroda said that Japan's economy has continued moderate recovery trend and price trend is surely improving, he expect CPI to hit 2% around first half of next year. Said impact of negative rates to spread to economy and will not hesitate to add stimulus, if needed. Further he said at G20 meeting in Washington that BOJ won't hesitate to take additional easing steps if needed to hit price target and negative rate policy and QQE is to achieve inflation target at earliest date possible.

On Monday, Japan’s nationwide departmental store sales tumbled 2.9 pct y/y, from up 0.2 pct in February, while this will not induce Prime Minister Abe for a raise in sales tax. On Sunday, Japanese PM Abe said that he is against any change in the current level of sales tax barring Lehman-like crisis or major natural disaster. Japanese chief cabinet secretary Suga also supported the Prime Minister’s comment today by saying that there is no change of plan to raise sales tax in April 2017 and not considering incremental sales tax hikes of 1 pct.

According to recent Reuters poll, out of 16 analysts 8 said that the BOJ will take easing steps at 27-28 April meeting, 3 expected in June and 5 said in July. Apart from this, 10 analysts were confident to say that the BOJ will adopt a combination of cutting rates deeper into negative territory and boosting asset purchases.

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

Further, 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 pct at year-end.

Lastly, the Bank of Japan will hold its two day monetary policy meeting on 27-28 April. The BoJ's 9-member policy board is expected to decide policy rate and update forecasts inflation and growth figures.

Meanwhile, Japanese Nikkei 225 closes up +0.19% at 16,906.54.