Japanese government bond futures rose on Friday, moving away from a seven-year low after Bank of Japan Governor Toshihiko Fukui said the central bank wants to be more convinced of the sustainability of capital spending and consumption before changing monetary policy.
Fukui's comments were taken as a sign that the central bank is in no hurry to raise interest rates, relieving some who were worried about an interest rate hike as early as next month and helping lead euroyen futures to post the biggest one-day gain in five months.
The short and mid-term sectors, that are more sensitive to changes in the monetary policy outlook, outperformed the rest of the market, with the five-year yield dropping sharply.
As widely expected, the BOJ kept rates at 0.5 percent on Friday, but is still seen lifting them to a 12-year high of 0.75 percent as early as the July-September quarter, most likely in August.
"Fukui's comments sounded as they were dispelling speculation for a rate hike in July," said a senior trader at a European security house. "His comments are likely to help the JGB market, that has been oversold due to concerns about an early rate hike, to stabilise."
September futures hit the day's high of 131.54 in evening trade moving further away from a seven-year low of 130.76 struck earlier this week. The lead contract closed the regular session at 131.30 up 0.18 point on the day.
Futures prices also received help earlier after the BOJ board's unanimous vote to leave monetary policy unchanged also calmed speculation for a rate rise in July.
"There was caution earlier in the market that some BOJ board members might vote for a rate hike amid growing concerns about global inflation pressures," said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Securities.
"But it was a unanimous decision, prompting market players to buy back futures. The short-covering then spread to the cash market as well," Hasegawa said.
Prior to the BOJ decision, some traders were already covering short positions after concluding that an overnight slip in US Treasuries was mild and the end to a JGB sell-off was near. The benchmark 10-year yield was down 4 basis points at 1.915 percent, off an 11-month high of 1.985 percent hit on Wednesday. Lead December euroyen futures jumped as much 5 basis points to 99.000 before slipping back to 98.990.
Swap contracts on the overnight call rate cut the chance of a July rate hike to 27 percent from 35 percent earlier in the day, while the chance of a move in August dipped to 84 percent from 89 percent. A hike by the September BOJ meeting is fully priced in.