Subdued demand for Japan’s inflation-linked bonds another problem for Abenomics

The Japan's Ministry of Finance has planned to reduce the issuance of inflation-linked Japanese government bonds at its next auction to 400 billion yen from an originally planned 500 billion yen as the price of the inflation-linked JGBs has been under pressure for months, as concerns about a slowdown in the global economy and weak oil prices suppress investors' inflation expectations.

The fall in the prices were accelerated after the BOJ adopted negative interest rates in January policy meeting. The lack of demand for linkers reflects a year of stagnation in a consumer price benchmark that the central bank is seeking to push to 2 pct.

A bond market measure of inflation expectations over the next decade known as the breakeven rate stands at just 0.36 percent after slumping as low as 0.13 percent last month. That adds to signs Prime Minister Shinzo Abe’s stimulus is failing, including the worst drop in factory production since the 2011 earthquake and the biggest slide in retail sales since a consumption-tax hike in 2014.

The JGB yields fell to records across maturities as the central bank scooped up an unprecedented one-third of outstanding debt through its quantitative-easing program.

Moreover, BoJ’s Kuroda its recent statement said that there is “a lot of room” in theory to cut the deposit rate from the current -0.1 pct. He also said that the decline in Japan’s interest rates is exactly what the BOJ intended, and will have a “positive impact” on asset prices. 

Meanwhile, the yield on the benchmark 10-year JGB was at -0.085 pct on Thursday, the lowest rate globally after Switzerland. Also, it dropped to a record low of -0.135 pct on March 18.