April 4, 2014 6:38 am JST

JGB trading seen nearing record lows in fiscal 2013

TOKYO -- Turnover of Japanese government bonds has dropped markedly in the year since the Bank of Japan launched its unprecedented quantitative easing policy, with the central bank's massive asset purchases draining the pool of JGBs available to be traded.

     In the first 11 months of fiscal 2013, turnover of long-term JGBs was down 18% on the year at 639 trillion yen ($6.09 trillion). Trades tied to raising funds are subtracted from over-the-counter transactions, compiled by the Japan Securities Dealers Association. Trading volume for the full year is on pace to come in under the 782 trillion yen of fiscal 2009 -- the lowest dating back to fiscal 1999, the earliest year with comparable data.

     Moreover, across-the-board JGB trading volume will likely sink to the lowest level in seven years.

     The BOJ continues to buy large amounts of JGBs in a bid to keep interest rates down and encourage the movement of funds into risk assets and capital investment. While these quantitative easing measures have succeeded in spurring inflation, they have also rapidly increased the central bank's bondholdings.

     In fact, the BOJ held 183 trillion yen of the paper at the end of 2013 -- a figure representing a roughly 60% surge from a year earlier and 19% of all outstanding JGBs.

     For certain long-term JGBs, the central bank's outlays account for more than half the value of paper newly issued since last April.

     These trends mean that brokerages have fewer bonds to trade. It has thus become harder to make large-lot trades of around 10 billion yen, some traders say. Concern is also growing that interest rates may destabilize.

     In mid-March, the central bank surprised observers when it decided to shave 10 billion yen off its purchases of bonds with more than 10 years remaining to maturity, bringing the total down to 170 billion yen.

     The move was immediately followed by a sudden drop in bond futures prices on fears of a deteriorating supply-demand balance. Long-term interest rates rose to a level not seen in a month and a half.

     "The main reason for this was that selling rapidly increased in the midst of low turnover due to the Bank of Japan's easing," says Eiji Doke of Citigroup Global Markets Japan.

     Some, like Mitsubishi Research Institute chief economist Yoko Takeda, see the possibility of interest rate fluctuations prompting businesses to hold back on investments and discouraging consumers from taking out loans, as they would be hard-pressed to judge the best time to do so.

     To address the problem, the Finance Ministry this month began expanding reissuances of high-demand paper in so-called auctions for enhanced liquidity. It shortened to one month from four the period the government must wait before reissuing the same type of bond. Issuances for those auctions are expected to rise by 1.2 trillion yen in fiscal 2014 to reach 8.4 trillion yen.