Japanese yields edge down as BOJ's rate hike expectations ease

Japanese government bond (JGB) yields dipped on Wednesday as expectations for a Bank of Japan rate hike faded, while strong results of the BOJ’s bond-buying operation lifted market sentiment.

The 10-year JGB yield fell 0.5 basis point (bp) to 0.82 per cent. The two-year JGB yield fell 0.5 bp to 0.375 per cent.

"The market expectations for the BOJ's rate hike, even raising the current policy rate to 0.5 per cent, is weakening," said Keisuke Tsuruta, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

"The Federal Reserve is cutting rates because the economy is slowing down, which means the domestic economy may slow down. Also, a stronger yen puts downward pressure on prices in Japan."

The yen has been strengthening because the BOJ is expected to raise rates at the same time as the Fed prepares to cut.

The BOJ is expected to keep short-term interest rates steady at 0.25 this week, but signal that further interest rate hikes are coming and highlight progress the economy is making in sustaining inflation around its 2 per cent target.

A hawkish BOJ board member Naoki Tamura last week called for short-term interest rates to be lifted to at least 1 per cent as soon as the second half of next fiscal year.

The Federal Reserve is expected to make its first interest rate cut in more than four years at 1800 GMT, with markets pricing a 2/3 probability of a 50 basis point cut. The BOJ's bond buying operations earlier in the day showed willingness for investors to hold their JGBs ahead of the BOJ's meeting, strategists said.