On Monday, the Japanese government bond (JGB) market experienced a notable uptick in yields, reflecting a cautious sentiment among investors as they closely monitored key events, including a significant bond auction and the Bank of Japan’s (BOJ) first bond purchase operation for the new fiscal year.
The benchmark 10-year JGB yield rose to a little over a one-week high, reaching 0.745% ahead of an upcoming auction scheduled for Tuesday. This uptick represented an increase of 1.5 basis points (bps), settling at 0.740%. Market participants were particularly focused on the BOJ’s bond buying session scheduled for Wednesday, with keen attention to any potential adjustments in the offer amount, as highlighted by Naka Matsuzawa, chief macro strategist at Nomura.
While the BOJ had indicated during its March policy meeting that the monthly purchase volume would remain relatively stable, it had adjusted the upper boundary of its purchase range for the April-June period. Matsuzawa anticipated a gradual reduction in the purchasing amount by the central bank towards the lower end of its offer range during this period. Additionally, policymakers may consider reducing monthly purchases in subsequent meetings, depending on the desired level of policy assertiveness.
This potential shift in strategy would represent a significant move towards balance sheet contraction, according to Matsuzawa’s analysis.
BOJ Governor Kazuo Ueda reiterated the central bank’s intention to eventually curtail its bond purchases. The BOJ has been notably aggressive in acquiring bonds to support its ultra-low interest rate policy, leading to its ownership surpassing half of the market share. This heightened ownership has resulted in liquidity constraints and hindered market functionality.
According to filings on Monday, the BOJ’s outright purchase of JGBs amounted to 87.5809 trillion yen ($578.55 billion) for the fiscal year ending in March, marking a decrease from the previous year’s record of 135.989 trillion yen. March’s total purchases hovered around six trillion yen, exhibiting minimal change from February.
Yields on the 20-year JGB climbed 2.5 bps to reach 1.515%, while the 30-year yield saw an increase of 2 bps, reaching 1.830%. Both yields reached approximately two-week highs, reflecting the cautious sentiment prevailing in the market.