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BOJ promise on easy policy to spur bond buying

TOKYO: Healthy buying is expected at Thursday's auction of 10-year Japanese government bonds (JGBs), the first long-term bond offering since a weekend Group of Seven meeting committed Japan to maintaining its ultra-easy monetary policy.

The Finance Ministry will offer 1.4 trillion yen ($13.2 billion) of 10-year JGBs, the last auction in a month of heavy bond and bill offerings totalling 21 trillion yen to help finance the government's fiscal stimulus spending.

Despite worries that investor demand would be overwhelmed by the flood of new bonds, the January auctions have produced strong results, supported in part by a hefty supply of funds fed to the money market by the Bank of Japan (BOJ) to address Y2K-related concerns.

"Solid demand is also expected at tomorrow's auction, since worries have waned that the BOJ might soon tighten policy and with the auctions this month going smoothly," said Noboru Iwamatsu, chief analyst at DKB Securities.

Based on the current yield of 1.655 percent on the most-recently issued 10-year JGB, analysts said the coupon rate for the 10-year bonds auctioned on Thursday is likely to be set at 1.6 or 1.7 percent, down from 1.8 percent at an auction two weeks ago.

INVESTOR APPETITE STRONG FOR BONDS

But analysts said they would not be too worried even if the coupon rate is set at the lower end of market expectations.

"A coupon rate of 1.6 percent would be the lowest since the auction last May, so the market could initially be disappointed. But even so, this would be short-lived," said Shunji Sakami, market strategist at Morgan Stanley Dean Witter.

The upbeat mood in the bond market got a further boost after finance ministers and central bank governors from the G7 industrialised nations pressed the Bank of Japan at a meeting last weekend to continue its zero-interest rate policy to stem the yen's appreciation.

The Japanese central bank has been increasingly keen to abandon the utlra-easy credit policy as soon as economic conditions permit.

The market had grown nervous about when the BOJ would tighten, but analysts said the central bank's weekend promise ties its hands at least until the next gathering of G7 finance ministers, probably in April.

BANKS HAVE FEW INVESTMENT CHOICES

Analysts said bullishness on JGBs also reflected the huge volume of idle funds held by financial institutions with few investment choices, due in large part to falling bank lending.

Monthly figures for Japanese bank lending show an unrelenting decline over the past two years, due to sluggish demand for loans as many corporations focus on shedding excess capacity and as big firms increasingly raise funds directly from the market.

As a result, Japanese banks have been pouring their spare cash into the bond market, keeping 10-year yields well below two percent.

"Idle funds held by Japanese investors are growing much larger than had been expected, with the downtrend in bank lending continuing despite the recovery trend in Japan's economy," DKB Securities' Iwamatsu said.

Analysts said the optimistic mood in the bond market is likely to continue at least until corporate book-closings at the end of March, with the key 10-year bond yield likely to hover in a well-worn range of 1.6 to 1.8 percent.

"Given that Japan's economy is on an uptrend, current JGB prices are probably too high and there are downside risks," Iwamatsu said.

"But as most banks and investors are showing a poor investment performance, they will have no choice but to continue putting their money into less risky JGBs ahead of the book-closings."-Reuters