Kuroda keeping options open helps calm bond market

[TOKYO] Bank of Japan Governor Haruhiko Kuroda has helped calm expectations for price swings in government debt by leaving open the possibility of more monetary stimulus.

A gauge of expected volatility in Japanese bond futures fell to the lowest in two weeks on Wednesday, retreating from a 17-month high set earlier this month, after Mr Kuroda told a news conference that he remains ready to adjust monetary policy, though no change is needed now. The yield for 10-year government debt is set for its tightest weekly range in a month.

Benchmark yields have swung between a record low and a three-month high this year, as tumbling oil prices spurred bets of an imminent expansion of stimulus. Mr Kuroda quashed that speculation in January when he said cheaper oil would help the economy. The decline in volatility this week will allow yields to drop by as much as half over coming months, according to Mitsubishi UFJ Morgan Stanley Securities Co.

"Investors were wary of Kuroda distancing himself from additional easing, but he took a very balanced stance," Naomi Muguruma, a Tokyo-based market economist at the company, said by phone Thursday. As long as the central bank continues its current bond purchases, yields will fall gradually and volatility will be subdued, she said.

The JPX JGB Futures Volatility Index fell for a third day to 3.47 on Wednesday, matching the lowest since Feb 2. It reached 4.03 on Feb 4, the most since August 2013.

"The market's mood has started to shift from only wanting to sell," Tadashi Matsukawa, head of fixed-income investment at PineBridge Investments Japan, said by phone Thursday. "There are some very early signs that people are becoming conscious of the risk they might be missing a chance to buy." Overseas investors bought a net 714.7 billion yen (US$6 billion) of Japanese bonds in the week to Feb 13, the most since the period ended Dec 5, according to Ministry of Finance data released Thursday. That was the fourth straight week of purchases, after sales in the previous four periods.

Benchmark 10-year government bonds yielded 0.39 per cent as of 9.39 am in Tokyo Friday, after rising to as high as 0.45 per cent at the start of the week. The yield has fluctuated within a 6 1/2 basis point range since Monday, the tightest for any week since Jan 16. Ten-day historical volatility in 10-year yields dropped to the lowest in a month.

The yield tumbled to an unprecedented 0.195 per cent on Jan 20, the day before Mr Kuroda said the underlying trend of consumer prices had not changed even after oil prices slid about 50 per cent over the past year. Decreasing energy costs will boost inflation in the longer term by improving corporate profits and boosting the real purchasing power of households, he said.

Expectations for an expansion in easing were pushed back following a Bloomberg News report last week that policy makers viewed more easing as counterproductive for now.

Mr Kuroda said Wednesday that the expansion of stimulus in October hasn't had bad effects on the economy, after the central bank maintained its plan to boost the monetary base at an annual pace of 80 trillion yen.

The benchmark yield will decline to 0.3 per cent by the end of March, according to the weighted average of estimates from 16 analysts surveyed by Bloomberg News between Feb 5-17. Mitsubishi UFJ Morgan Stanley forecasts the rate may fall as low as 0.2 per cent from now to the end of September.

"Expectations for an early expansion of stimulus were especially strong among foreign investors, and got wiped out at the January policy meeting," said Mitsubishi UFJ Morgan Stanley's Muguruma. "If volatility continues to ease, it'll give investors confidence to come back to the market."

BLOOMBERG