Japan tests demand in another debt sale after Ueda rate remarks

THE Japanese government will face another test of demand in the bond market with a five-year auction on Tuesday (Sep 12) in the first sale since central bank governor Kazuo Ueda jolted markets with comments on the negative interest rate policy.

The Ministry of Finance will sell 2.5 trillion yen (S$23.21 billion) of debt maturing in June 2028 on Tuesday, followed by 1.2 trillion yen of 20-year debt in an auction on Thursday.

There have been repeated cases of weak demand in auctions in the past month, including a 20-year auction in August in which the so-called tail, or the difference between average and cut-off prices, was the widest since 1987, a notable sign of poor appetite.

Yield on the nation’s benchmark five-year debt climbed to the highest level since January on Monday while 10-year equivalent rose above 0.7 per cent for the first time in more than nine years after Ueda told the Yomiuri newspaper it’s possible the Bank of Japan (BOJ) will have enough information by year-end to judge if wages will continue to rise – a key factor in deciding whether to pare back its super-easy policy.

The move spurred the central bank to announce it will conduct fund-supplying operations against pooled collateral on Sep 14 by offering five-year loans, aimed to slow the rise in yields.

“I see the bond market stabilising after the BOJ’s announcement on the five-year loan operation but it stops short of giving a sense of reassurance,” said Akio Kato, chief manager of the strategic research and investment division at Mitsubishi UFJ Kokusai Asset Management in Tokyo. “The auction is likely to draw bids for the lowest price.”

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With expectations of further increases in yields, investors may be reluctant to buy at the current levels.

Monday saw Japan’s government bonds suffer a sell-off while the yen and banking stocks climbed. If the central bank becomes confident prices and wages will keep going up sustainably, ending negative interest rates is among the options available, Ueda said in the interview published on Saturday. Still, he said the BOJ is some distance away from achieving its price stability target and would continue its patient monetary easing. BLOOMBERG