Japanese government bonds slipped on Tuesday as investors locked in profits after yields fell to six-month lows, while the Bank of Japan stuck to its view on the economy and trimmed expectations for rate cut in the coming months. BoJ Governor Masaaki Shirakawa said each central bank should take monetary policy steps most effective for its own nation's economy after the BoJ left interest rates steady at 0.5 percent in a widely expected move.
Shirakawa also said downside risks for Japan's economy are rising, but gave no further details on the path of future monetary policy. "Shirakawa didn't say anything decisive to give direction to the market," said Tomoyuki Arima, a senior JGB dealer at Tokai Tokyo Securities. "Investors are unwilling to chase yields further lower because current market levels are already where investors can make money only when the BoJ does cut rates," Arima said.
The BoJ rate decision came just after the Australian central bank cut interest rates by an unexpectedly large 100 basis points, which stirred talk of co-ordinated central bank action to stem the worsening credit crisis and helped Asian stocks to rebound.
Analysts said the BoJ has already done what was necessary to ease money market strains with other central banks, and a rate cut may be not an appropriate policy option as Japan's financial system remains relatively stable compared with those overseas. But futures fell after the BoJ also kept the Lombard rate for direct bank lending unchanged at 0.75 percent, dashing speculation about a rate cut.
December futures dropped as low as 137.96 after ending day trade at 138.30, down 0.25 point. In early trade, futures dropped as much as 0.85 point to 137.70 on the back of Tokyo's Nikkei average tumbling to a five-year low and below the psychologically key 10,000 level at one stage.
Traders said foreign players were among sellers of JGB futures to take profits and offset losses in other assets. Trade remains volatile because many players are shying away from the market given the sharp sell-off in stocks and the freeze in money markets.
The benchmark 10-year yield climbed 8 basis points to 1.450 percent, jumping from a six-month trough of 1.355 percent hit at the start of trade. The five-year yield rose 6 basis points to 0.960 percent after having fallen to 0.905 percent.
Shorter maturities were under pressure after comments by former Deputy BoJ Governor Toshiro Muto further reduced expectations for a BoJ policy rate cut. Muto said it is difficult to think the Japanese economy would improve if the BoJ cut interest rates, a domestic news agency reported. The two-year yield rose 4 basis points to 0.720 percent, bouncing back from an earlier low of 0.655 percent.
Lead euroyen futures were down 2 basis points at 99.260 after dropping as much as 4.5 basis points. Yet expectations that the BoJcould cut interest rates in the coming months as part of a co-ordinated effort with other central banks to deal with the global financial crisis have not disappeared, and helped JGBs to limit losses. Swap contracts on the overnight call rate show that investors still see a roughly 30 percent chance of a 25 basis point rate cut by the BOJ early next year, down from 60 percent before the BoJ rate announcement on Tuesday.
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