Hawkish Fed helps revive Japan's bond market functions: BOJ survey

Tokyo

VOLATILITY caused by expectations of US monetary tightening revived Japan's bond market functions in February, a survey showed, in a welcome development for the Bank of Japan as it frets over the dwindling liquidity caused by its huge presence.

Japanese government bond (JGB) yields climbed to multi-year highs last month, as stubbornly hot US inflation and more hawkishness from other major central banks spurred bets that the Bank of Japan would need to tighten policy soon.

As a result, a diffusion index measuring the degree of JGB market functioning stood at minus 21 in February, improving from minus 25 in November, according to a quarterly central bank survey of 69 financial institutions conducted on Feb. 1-7.

The index is calculated by subtracting the ratio of respondents who felt market functions were low from those who felt they were high. A negative reading means more respondents feel market functions are low.

The February index level was the smallest negative reading since November 2015, a sign financial institutions felt market functions have recovered to levels before the BOJ's introduction of negative interest rates in January 2016.

Respondents of the survey expect yields to keep creeping up.

They project the benchmark 10-year JGB yield to stand at 0.20 per cent as of March 2023, up from 0.15 per cent projected in November.

The 10-year JGB yield fell 0.5 basis point to 0.175 per cent on Tuesday, its lowest level since Feb. 3, partly on rising demand for bonds as a safe haven after Russia's invasion of Ukraine. REUTERS