Japanese bonds rally as BoJ easing consensus rises among investors

The Japanese government bond rallied Thursday as consensus expectations rose among investors that the Bank of Japan will lower its key interest rate further into negative territory in its monetary policy meeting scheduled next week.

The benchmark 10-year bond yield, which moves inversely to its price, fell nearly 2 basis points to -0.031 percent, the super-long 30-year note yield dipped nearly 3 basis points to 0.561 percent and the short-term 2-year JGB yield slid 1/2 basis point to -0.272 percent by 06:10 GMT.

The Bank of Japan will hold its two-day monetary policy meeting on 20-21 September, announcing its decision on Wednesday, 21 September is a close call. But, we foresee that the BoJ's 9-member policy board is likely to cut rates on excess reserves and expand its monetary base as stagnant growth and continued risk of deflation will weigh on BoJ Governor Kuroda’s decision.

According to recent Reuters poll, 60 percent of economists see the Bank of Japan easing in September 21; 40 percent see them stay unchanged. Pollsters are split on possible policy action and over 50 percent said the BoJ will adopt more flexible wording on inflation targeting.

Various articles published yesterday pointed to the higher probability that the Japanese central bank will lower its key policy rate by about 10-20 basis points. According to Nikkei daily paper and Reuters, the BoJ will cut its interest rate deeper into negative territory.

Although other news articles, including another one from Bloomberg, affirms that there are a variety of different opinions on the board and Governor Haruhiko Kuroda and his delegates reportedly prefer a rate move to expanding quantitative easing, which is thought to be reaching its limit. Therefore, this backs our expectation that the marginal deposit rate will be trimmed next Wednesday.

Meanwhile, the benchmark Nikkei 225 closed down 1.26 percent at 16,405.01 and the broader Topix index also closed 1.04 percent lower to 1,301.11 points.