Japanese government bond (JGB) futures trimmed gains after hitting a two-month high on Friday due to a late surge in Tokyo share prices and after the Bank of Japan held interest rates steady as expected. The Nikkei share average rose 2.7 percent after falling by more than 3 percent earlier in the day, tempering gains in JGB futures.
Investors took profits after the BOJ kept interest rates steady at 0.3 percent.
In a news conference following the decision, BOJ Governor Masaaki Shirakawa said cutting interest rates further might cause various problems in ensuring smooth fund supply in money markets. Shirakawa's remarks suggest the BOJ is in no rush to embark on additional rate cuts, analysts said.
"I think it is too simplistic to think that the next immediate move will be an interest rate cut, since the governor himself emphasised the harmful effects of having interest rates approach zero percent," said Junko Nishioka, chief Japan economist at RBS. But Shirakawa also seems to be on guard against downside risks to the economy. The central bank's stance is likely to stay in the direction of monetary easing, Nishioka said, adding that market expectations for further rate cuts could grow if equities fall towards the end of Japan's fiscal year in March.
December 10-year JGB futures stood at 139.21 in evening session trade. They had risen 0.03 point to 139.30 in the day session, and hit a two-month high of 140.10 at one point. The yield curve flattened, as longer-term JGBs rallied while two-year notes under-performed. The benchmark 10-year JGB yield was down 3.5 basis points at 1.400 percent, after falling to a six-week low of 1.375 percent earlier in the day. The two-year JGB yield rose 2.5 basis points to 0.555 percent.
FUND SUPPLY OPERATIONS:
While the BOJ's decision to stand pat on interest rates was expected, there was slight disappointment that the central bank did not announce more aggressive steps in other areas, market players said.
The central bank said it would be more flexible in buying commercial paper under repurchase agreements and that it would consider ways to generally make funding operations more flexible. "It seems there was some profit-taking since nothing came out of the BOJ's policy meeting," said a portfolio manager for Japanese insurer.
There had been some hope that the BOJ would announce steps such as outright purchases of commercial paper, or increase its purchases of long-term JGBs, market players said.
Gains in longer-dated JGBs led the market's advance. "The drop in yields of 10- and 20-year cash JGBs was triggered by receiving in the swap market, likely on the back of demand from real money investors such as life insurers and pension funds," said a trader at a Japanese trust bank.
"But volume is low in both the cash and swap markets, and a few trades can easily move yields around," the trader said. US Treasuries rallied on Thursday as recession fears pummelled stock markets and drove investors to the safety of bonds and cash, with the benchmark 10-year dropping to a five-decade low.
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