Japan’s Bond Traders Count on BOJ to Tide Over Supply Deluge

(Bloomberg) -- Keep calm and trust the Bank of Japan. That's the mantra for traders in the nation's bond market after the government boosted debt issuance by almost 40% to fund its stimulus spending.

Market reaction to Wednesday's increase in planned bond sales to 212.3 trillion yen ($2 trillion) for this fiscal year has been rather muted. That's even as analysts said the 59.5-trillion yen addition, the bulk of which would cover shorter maturities, exceeded expectations.

The reason: traders are convinced that the BOJ will step up its bond purchases to help absorb the deluge of supply.

“An increase of such magnitude in debt issuance has not been seen in the past, said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “The increase was concentrated more in duration of up to 10 years because of expectations that the BOJ will help contain any rise on yields led by the supply concern.”

Such optimism isn't unfounded.

The central bank, which aims to keep the benchmark yields around zero percent under its yield curve control policy, has already increased its buying of bonds with maturities of one to 10 years to mitigate the impact of increased government borrowing via these tenors.

Japan's benchmark 10-year yield was unchanged at minus 0.005% as of 10:34 a.m. in Tokyo.

READ: Kuroda: BOJ Will Mull Changing Rates of Yield Control If Needed

“The impact of the issuance increase on JGBs has been limited due to expectations that the BOJ will probably take proactive stance in buying bonds,” said Eiichiro Miura, general manager of the fixed-income department at Nissay Asset Management Corp. in Tokyo.

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