Japanese government bond prices fell on Monday as investors remained cautious ahead of a policy board meeting this week at the Bank of Japan at which the central bank could decide to end its five-year-old super-easy monetary policy.
JGBs were also sluggish after the benchmark 10-year US Treasury yield hit a one-year high on Friday on mounting concerns about global monetary policy tightening.
With the focus firmly on the BoJ's March 8-9 board meeting, traders said activity was likely to be subdued with prices staying in narrow ranges. Analysts said they expect the market to take the news of any monetary policy shift in its stride given that it has had plenty of time to factor in such a move.
"At this point, the market's reaction to a shift should be fairly neutral whether it comes this week or next month because traders realise that it's just a matter of time," said Tetsuya Miura, bond strategist at Shinko Securities.
"I think most of the selling linked to the shift is done and over with. Only a significant policy surprise should really shake the market."
Some analysts said the rollover in the lead 10-year JGB futures contract later in the week could boost volatility as the last trading day for the current March contract falls on Thursday, the same day that the central bank announces its policy decision.
"With the focus on the BoJ, the change in the lead futures contract could become a source of heightening volatility as it coincides with the BoJ meeting," said Naomi Hasegawa, senior fixed income strategist at Mitsubishi UFJ Securities.
A Reuters poll on Friday conducted after data was released showing Japan's core consumer prices rose more than expected in January found that 15 of 31 market players expected the BoJ to end this week its quantitative easing policy of flooding the banking system with excess funds.
Another 14 said they expected a policy shift on April 11, and the other two forecast a move at the central bank's April 28 meeting.
Some in the market said that Japanese Prime Minister Junichiro Koizumi's call on Monday for the BoJ to be prudent about policy making ahead of its board meeting had prompted some relief buying in futures in the afternoon, although those gains were erased by last-minute selling.
Dealers brushed off comments on Monday from BoJ Governor Toshihiko Fukui, who said he had no preconceptions about monetary policy in light of the steady rise in consumer prices.
Yields on two- and five-year JGBs have surged to five-year highs over the last few weeks on growing speculation about an imminent policy shift, and on Friday, after the CPI, the 10-year yield rose to a 19-month high of 1.690 percent.
CLOCK TICKS ON BOJ On Monday, the two-year yield climbed two basis points to 0.520 percent, matching a high hit last week, while the five-year yield rose two basis points to 1.090 percent.
The 10-year yield was up 1.5 basis points at 1.630 percent while March futures ended the afternoon down 0.22 point at 135.79.
December euroyen futures were down 0.005 point at 99.400, pricing in an overnight call rate of about 0.5 percent by the end of the year.
Some market participants were awaiting the Ministry of Finance's offer of 10-year CPI-linked JGBs on Tuesday and five-year JGBs on Friday. Others said a lack of action by the BoJ this week could destabilise the market, which has already factored in not only an end to the super-loose monetary policy but also rises in the unsecured overnight call money rate by the end of the year.
"If the BoJ doesn't end its quantitative easing policy this week, which the market has already discounted, volatility will rise sharply on a perception the BoJ has succumbed to political pressure," said Masuhisa Kobayashi, chief JGB strategist at Barclays Capital.
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