Short-term JGBs gain on BoJ easing hopes; super-long follows US Treasuries

The Japanese bond traded mixed Wednesday as investors speculate that the Bank of Japan will lower its key interest rate further into negative territory. On the contrary, long-term JGBs slumped as the United States 10-year Treasury yields broke the 1.70 percent mark on rising risk appetite among investors.

The benchmark 10-year bond yield, which moves inversely to its price, rose 1/2 basis point to -0.009 percent, the super-long 30-year JGB yield jumped 7-1/2 basis points to 0.600 percent and the short-term 2-year JGB yield slid 3-1/2 basis points to -0.273 percent by 07:00 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.

The BoJ is considering options to steepen the JGB yield curve, including adjusting its bond purchases or clarifying forward guidance on policy, they added.

Following U.S. Treasuries, the benchmark 10-year note settled at 1.732 percent, from Monday’s closing of 1.671 percent. This was marked as the highest close of yields since June 23 this year.

In terms of recent economic data, Industrial production in Japan, a broad measure of factory output registered a surprise fall during the month of July. Japan’s industrial production declined 0.4 percent in July after rising 2.3 percent in June, data released by the Ministry of Economy, Trade and Industry showed Wednesday. A median estimate of economists forecast zero growth following the preliminary estimate August 31.

Further, on an annualized basis, output fell 4.2 percent. Japan’s capacity utilization climbed 0.6 percent, official data added. Also, the Cabinet Office has revised its estimate of second quarter gross domestic product to 0.2 percent, from a preliminary forecast of zero.

According to a recent report from Nikkei, the BoJ may consider lowering interest rates further into negative territory next week. That would mark the first rate cut since January, when policymakers first ventured into negative-rate territory.

Meanwhile, the benchmark Nikkei 225 closes down 0.69 percent at 16,614.24 and the broader Topix index also closed 0.62 percent lower to 1,314.74 points.