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JGBs jump after G7 presses BOJ to keep easy policy

TOKYO: Japanese government bonds were sharply higher in late trade on Monday after the Group of Seven (G7) nations at its weekend meeting pressed the Bank of Japan (BOJ) to maintain its zero interest-rate policy, quashing speculation the hyper-loose policy might end in the near future.

Buying was led by Japanese investors in 20-year JGBs, where the yield tumbled to 2.230 percent from 2.340 percent late on Friday.

JGB futures also gained broadly, with prices of the benchmark 10-year JGB futures hitting a seven-month high.

March JGBs closed up 0.85 at 133.70, retraced slightly from the intraday high of 133.76, which was a lifetime high for the March contract and the highest since June 10 for a benchmark contract.

The yield on the key 219th 10-year cash bond fell to 1.660 percent from 1.740 percent on Friday. The communique indicates "Japan has pledged to maintain its stimulative policies at least until the next G7 meeting (likely in April)," said Atsushi Mizuno, chief strategist and economist at Deutsche Securities.

The G7 finance ministers and central bank governors said in a closing communique that Japanese authorities "reiterated their intention, in the context of their zero interest rate policy, to provide ample liquidity to ensure that deflationary concerns are dispelled".

On currencies, Japan convinced its G7 partners to express shared concern over the yen's appreciation, on condition that Japanese monetary authorities conduct appropriate policies.

Traders interpreted that to mean the burden of keeping the yen's rise in check fell mostly on monetary policy.

A trader at a brokerage house said: "It is evident that there are many obstacles that will prevent the BOJ from scrapping its zero interest rate policy."

While BOJ Governor Masaru Hayami has repeatedly said that the central bank will maintain its current zero interest rate policy until deflationary fears are dispelled, he has also called the policy "abnormal" and said its side effects are growing.

Market sentiment was also boosted on Monday as bond oversupply concerns eased after a series of auctions last week invited healthy demand from investors.

"We were seeing Japanese pension funds among investors who were adding long and (20-year) super-long bonds to their portfolios," a trader at another trust bank said.

Technical buybacks ahead of the key contract rollover also buoyed the March contract, traders said.

Traders said the post-G7 rally would likely continue as they were cautiously optimistic that investors would show demand in the 10-year JGB auction on Thursday as long as the yield on the most recent 219th bond did not fall below 1.6 percent.

The coupon on the previously auctioned 10-year JGBs was 1.8 percent.

Traders will keep an eye on the BOJ's stance in the money market and on exchange rates, they said.

In accordance with its pledge to provide ample liquidity, the BOJ set a projected net surplus of 1.0 trillion yen in the money market after its regular 0020 GMT operation on Monday.

The dollar failed to garner much direction against the yen in Tokyo on Monday. The greenback was at 104.84/89 yen compared with Friday's U.S. close of 104.68 yen.

"If the yen rises despite the G7 statement and the BOJ's pledge to keep its zero-interest rate policy, what can the central bank do?" the second trust bank trader said.

Key September TIBOR-based euroyen futures contract was higher at 99.665, compared with Friday's day-session settlement of 99.625.-Reuters