Japanese bonds narrowly mixed in thin trade; focus on BoJ’s policy decision

The Japanese government bonds narrowly mixed on Monday, succumbing to thin trading activity during a relatively quiet session that saw little data of much significance. Also, investors are awaiting the Bank of Japan’s monetary policy decision, which is scheduled to take place on Friday.

The yield on the benchmark 10-year bonds, which moves inversely to its price, fell more than 1 basis point to -0.236 percent, the yield on long-term 30-year note rose 1 basis point to 0.281 percent, the yield on 20-year note also jumped nearly 1 basis point to 0.190 percent and the short-term 2-year JGB yield dipped 1/2 basis points to -0.329 percent by 07:00 GMT.

According to a Bloomberg poll, 78 percent of analysts expect that the Bank of Japan will expand easing this week. Bloomberg's survey was conducted during July 15-22 which found 32 of 41 analysts forecast the BoJ will expand their stimulus program.

An increase in purchases of exchange-traded funds remains the most likely area for a boost, followed by a deeper cut in the negative interest rate applied to a portion of the money that commercial banks deposit at the BoJ.

Looking ahead, we expect an expansion of the central bank's asset purchase programme to 85 trillion yen annually, which includes scaling up of ETF and J-REIT. Also, the BoJ is expected to witness 10 basis points cut in its marginal deposit rate to -0.2 percent.

Moreover, Bank of Japan Governor Haruhiko Kuroda, while speaking to reporters at the G20 meeting, said that the Bank of Japan will add stimulus if needed. He further added that Japan is in a gradual recovery phase, while continuing to be in a virtuous economic cycle and mentioned that direct underwriting of debt is banned in the developed world.

In terms of economic data, Japan’s June trade surplus rose to 692.8 billion yen, the consensus was for a surplus of 474.4 billion yen, from a deficit of -40.6 billion yen in May. Additionally, country’s exports fell 7.4 percent y/y, lower than the expectation of -11.3 percent fall, from down -11.3 percent in May.

Individually, exports to the US were down 6.5 percent y/y, exports to Asia down 10.6 percent y/y and export to China down 10.0 percent y/y. Further, imports declined 18.8 percent y/y, lower than the consensus of -20 percent y/y drop, from down -13.8 percent in May.

“The market expects the bank to ease policy further into negative territory by cutting rates to -0.15 percent from -0.1 percent while leaving the QE programme at ¥80 trillion per month, said Rand Merchant Bank (RMB) in a research note.

Lastly, investors will remain keen to focus on the CPI data, industrial production, retail sales on Thursday at 23:30 GMT and BoJ policy decision on Friday.

Meanwhile, the benchmark Nikkei 225 index closed down -0.04 percent at 16,620.29, and the broader Topix index closed lower 0.16 percent to 1,325.36 points.