Bank of Japan: Minutes of the fifteenth round of meetings of the “Bond Market Group” (June 7, 2022)

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July 12, 2022

Financial Markets Department

Bank of Japan

Minutes of the 15th round of meetings of the “Bond Market Group”

1. Overview

(1)

Date

Commercial Banks/Securities Firms Group

June 7 at 3:45 p.m.

Purchasing group

June 7 at 5:30 p.m.

(2)

Form of the meeting

By conference call

(3) Attendees

  • Responsible for bond issues in financial institutions, participating in the “Bond Market Survey”
  • General directorof the Financial Markets Department, Head of Market Coordination and Analysis Division, Head of Market Operations Division, Head of Market Infrastructure Division
  1. Introduction by the Bank of Japan
  • The Bank explained to each group (1) the results of the “bond market survey”, (2) liquidity in the JGB market and (3) recent developments in financial markets and market operations.
  1. Opinions provided by participants
  • The Bank proceeded to an exchange of views with the participants on the above subjects. The views provided by the participants are as follows.

Recent Trends in the Japanese Bond Market

  • Global financial markets have been unstable since January 2022, mainly in the context of changes in monetary policy stance in the United States and Europe, confusion over the situation around Ukraine, an increase in inflationary pressures due to higher crude oil and commodity prices and a lower risk tolerance of market participants.
  • Long termJGB yields rose to 0.25%, the upper end of the range

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fluctuations fixed within the framework of the control of the yield curve (YCC) of the Bank. This increase is due to factors such as interest rate hikes overseas and speculation of a change in Bank policy direction, primarily among overseas market participants. Thereafter, long-term JGB yields moved in a narrow range around

  • 0.25%, mainly due to the Bank’s unexpected purchases of JGB and fixed rate purchases for consecutive days, and the overall development has been stable recently.

  • Long termYields on JGBs remained in a narrow range due to the Bank’s purchases of JGBs, including fixed rate buy trades. By contrast, in the super-long zone, interest rates have risen significantly and the yield curve has steepened due to still high yield expectations.

Operation and liquidity of the Japanese bond market

  • The functioning of the JGB market deteriorated around the 10-year zone as long-term JGB yields moved around the upper end of YCC’s range of fluctuations. Such a drop is considered inevitable to some extent because YCC is a policy that controls interest rates within a certain range.
  • Liquidity in the Japanese bond market decreased at the end of March 2022, mainly due to a drop in the risk tolerance of market participants and the slowdown in investment in the market. As a result, the market was caught in a vicious cycle of rising interest rates and it was easier to amplify JGB price swings. Subsequently, the situation improved and liquidity returned to its pre-end March level.
  • The functioning of the JGB market has not changed significantly since the last meeting in December 2021 and liquidity has remained more or less at the level pre-pandemic level.
  • The fact that interest rates in Japan have risen in line with developments in foreign markets indicates that the functioning of the market has remained at a certain level. It should be noted, however, that there are sometimes situations where, for example, the yield curve is distorted and the supply and demand for certain issues tighten excessively.
  • Market participants are feeling the decline in the functioning and liquidity of the Japanese bond market. We consider the depth of the market when realizing

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transactions, such as emission substitution in a considerable size.

  • The investor base lacked diversity and the number of investors deteriorated over the super-long-term zone due to the amplitude of bond price fluctuations which has been restricted to a little long-term.

Bank operations and others

  • Volatility has been suppressed in the Japanese bond market from April 2022 compared to the markets of the United States and Europe through a series of agile operations by the Bank and thus a stable investment climate has been achieved . We expect the Bank to continue to conduct its market operations in a flexible and timely manner.
  • We would like to ask for the Bank’s consideration even in the event of significant stress in the Japanese bond market in the future so that liquidity is maintained and market function is fully improved.
  • We would like to ask the Bank to implement the Securities Lending Facility more flexibly when supply and demand conditions tighten in the repo market, such as when JGB prices fluctuated sharply in late March 2022.
  • The number of investors declined due to price fluctuations which continued to be suppressed and a subsequent decrease in profit opportunities in the Japanese bond market. As we have already requested, we would like to ask the Bank to take measures in light of the situation to improve liquidity in the JGB market, for example by decreasing the amount of JGB purchases in the very long term area.

Opinions and risks on the outlook for the Japanese bond market

  • Long termYields on JGBs are expected to be permanently affected by foreign interest rates and move around 0.25%, the upper limit of the range set by the Bank’s YCC, for the time being.
  • On the downside risks, we pay attention to the impact of COVID-19, the situation around Ukraine, the evolution of foreign exchange markets and the effects on economies and prices of goods at home and abroad, and the evolution of monetary policy in each economy.
  • There are concerns about an imbalance of supply and demand between the different

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JGB issuances become more stringent and, in extreme cases, outstanding issuances eligible for JGB purchases by the Bank in the market may be depleted.

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Disclaimer

Bank of Japan published this content on July 12, 2022 and is solely responsible for the information contained therein. Distributed by Audienceunedited and unmodified, on Jul 12, 2022 07:13:08 UTC.

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