By Yoshiaki Nohara
(Bloomberg) – Japan’s 10-year bond yields fell to the lowest level in three weeks after the central bank kept its benchmark interest close to zero and said beating deflation is a “critical challenge.”
Bond futures traded near the highest level this year as the Bank of Japan maintained its loan program for commercial banks and held monthly purchases of government debt at 1.8 trillion yen ($19.8 billion). The central bank also said at the end of a two-day meeting that policy makers would keep its extremely accommodative financial environment.
“I don’t think the BOJ will be able to head for the exit for the next few years, which should continue to support bonds,” said Daisuke Uno, chief strategist in Tokyo at Sumitomo Mitsui Banking Corp., a unit of Japan’s third-largest banking group. “They will not end their current low-rate policy and monetary easing in the near future, while they may take additional steps to enhance those measures.”
The yield on the 1.3 percent bond maturing December 2019 fell one basis point to 1.315 percent as of 3:03 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price gained 0.087 yen to 99.869 yen. The yield matched the lowest since Jan. 29. A basis point is 0.01 percentage point.
Ten-year bond futures for March delivery fell 0.01 to 139.60 as of the afternoon close at the Tokyo Stock Exchange. They reached 139.76 on Feb. 16, the highest since Dec. 30.

Bank of Japan

“Political pressure may mount again on the BOJ should the yen rise against the dollar and stocks drop,” said Takashi Nishimura, an analyst in Tokyo at Mitsubishi UFJ Securities Co. “Banks with extra cash continue to buy short-term securities, which is also providing confidence for longer-term ones like 10- year bonds.”
The BOJ on Dec. 1 introduced a 10 trillion yen program to make three-month loans at an interest rate of 0.1 percent. The move came as government officials urged policy makers to support the economy by fighting deflation after the yen surged to 84.83 per dollar on Nov. 27, the strongest since July 1995.
Consumer prices excluding fresh food slid 1.3 percent in December from a year earlier, a 10th monthly decline, the statistics bureau said Jan. 29. Deflation, a general drop in prices, enhances the value of the fixed payments from bonds.

Fed Minutes

Demand for Japan’s bonds was tempered after Treasuries fell yesterday as minutes of the Federal Reserve’s January meeting showed policy makers debated removing stimulus measures.
Officials unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries.
“As external factors deteriorate, bonds should test lower prices,” said Kazuhiko Sano, chief strategist in Tokyo at Citigroup Global Markets Japan Inc.
Japan’s government bonds handed investors a loss of 0.1 percent this year, according to an index compiled by Merrill Lynch & Co.

–With assistance from Yumi Ikeda and Mayumi Otsuma in Tokyo and Cordell Eddings in New York. Editors: Garfield Reynolds, Nicholas Reynolds

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at +81-3-3201-7446 or ynohara1@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at +81-3-3201-2078 or rswift5@bloomberg.net.

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