Japan shorter-end yields fall as stronger yen dims rate hike bets

According to Business Recorder, yields on shorter-dated Japanese government bonds declined on Wednesday after a firmer yen reduced expectations of aggressive rate increases by the Bank of Japan. The two-year yield, which tracks the central bank's policy most closely, slipped one basis point to 1.835 per cent. Meanwhile the five-year yield dropped 1.5 basis points to 2.22 per cent, and yields typically move opposite to bond prices. The 30-year yield edged up 0.5 basis points to 3.965 per cent.

Traders are weighing how the yen's abrupt climb against the dollar affects the BOJ's policy outlook, and the curve has moved over several recent sessions. Masayuki Koguchi of Mitsubishi UFJ Asset Management said that if the yen holds its gains, lower inflation fears could draw buyers to longer maturities. He added that a stronger yen, by easing inflation pressure, would weaken hopes for quicker BOJ rate increases.

JGBs had rallied sharply last week as investors bought ultra-long debt to reverse steepening bets once the yen jumped. Trading turned mixed this week as some sold longer maturities over Japan's expansive spending. Shinji Ebihara of Tokio Marine Asset Management said he expected flattening over the long term given few signs of steepening. He also felt fears of the central bank lagging on inflation had subsided, helped by US pressure, and strong retail JGB sales could curb future issuance.