JGB yields near 22-month lows after tankan

Japanese government bond yields held near 22-month lows on Friday, as dealers shrugged off a survey from the Bank of Japan (BOJ) that showed a better improvement than expected in corporate sentiment. Traders said the surprisingly strong quarterly tankan survey had not removed doubts that Japan's economy was still struggling to break out of a soft patch. And even data showing deflation eased in May, with nation-wide prices flat compared with a year ago for the first time in eight months, failed to spark selling.
"The market is well supported because the tankan doesn't entirely remove doubts about the economy," said Koji Shimamoto, chief strategist at BNP Paribas.
"And Muto's recent comments show that the BOJ won't rush to end quantitative easing even if the CPI turns positive."
Comments by BOJ Deputy Governor Toshiro Muto last week added to a recent chorus of officials suggesting that the central bank was in no hurry to dismantle its quantitative easing policy, which has pinned short-term rates near zero for over four years.
The BOJ has stated repeatedly that it will keep its ultra-loose monetary policy in place until Japan's seven-year battle with deflation is over for good.
Many analysts expect inflation to edge into positive territory from as early as late 2005, but euroyen futures show the market does not expect a BOJ rate rise until late 2006 at the earliest.
JGBs have also been swept up in the last two weeks by a global bond rally, partly driven by a view that record-high oil prices would slow economic growth.
The benchmark 10-year JGB yield rose 0.5 basis point to 1.170 percent, after at one point matching Thursday's 22-month low of 1.165 percent. The five-year JGB yield rose one basis point to 0.410 percent after it hit a 22-month low of 0.395 percent on Thursday.
Benchmark 10-year JGB futures for delivery in September fell 0.06 point in price to 141.14.
The tankan survey's headline diffusion index for big manufacturers improved to plus 18 in June from plus 14 in March. beating economists' median forecast of plus 15.
The survey also showed large Japanese companies plan to increase capital spending by 9.4 percent in the business year to March. That was above economists' forecast of a 4.5 percent rise.
"Capital spending plans were surprisingly strong the Bank of Japan could revise its forecast of the economy up," said Naoki Iizuka, chief economist at Dai-ichi Life Research Institute.