Hawkish Fed helps revive Japanese bond market functions – BOJ survey

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TOKYO, March 1 (Reuters) – Volatility sparked by expectations of U.S. monetary tightening revived Japanese bond market functions in February, a survey showed, in a welcome development for the Bank of Japan, which is worried about the decrease in liquidity caused by its huge presence.

Yields on Japanese government bonds (JGBs) hit multi-year highs last month as stubbornly high US inflation and the ferocity of other major central banks boosted bets that the Bank of Japan will soon tighten its Politics. Read more

As a result, a Diffusion Index measuring the degree of JGB market functioning stood at minus 21 in February, down from minus 25 in November, according to a central bank quarterly survey of 69 financial institutions conducted from May 1-7. February.

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

February’s index level was the smallest negative reading since November 2015, a sign that financial institutions believed market functions had returned to levels prior to the BOJ’s introduction of negative interest rates in January 2016 .

“Market liquidity has improved somewhat as yields have risen and traded in a wider band, leading to an increase in trading volume,” said a BOJ official in charge of the investigation. .

Survey respondents expect yields to continue to rise. They expect the benchmark 10-year JGB yield to settle at 0.20% in March 2023, down from 0.15% expected in November.

The 10-year JGB yield fell 0.5 basis points to 0.175% on Tuesday, its lowest level since Feb. 3, in part due to growing demand for bonds as a safe haven after the invasion of the Ukraine by Russia. Read more

Under control of the yield curve, the BOJ is buying huge amounts of JGB to cap the 10-year yield around 0% to stimulate the economy.

Years of massive bond buying by the BOJ has drained liquidity and squeezed private investors out of the bond market, leading to a decline in market functions.

In an effort to revive the bond market, the BOJ has taken steps to allow 10-year yields to move more widely around its target.

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Reporting by Takahiko Wada and Leika Kihara; Editing by Simon Cameron-Moore

Our standards: The Thomson Reuters Trust Principles.

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