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Japan long rates turn negative ahead of BOJ policy decision

Global growth fears and expectations of inflation downgrade put pressure on 10-year yield

Japan's benchmark long-term interest rate touched minus 0.050% on Jan. 22. (Photo by Wataru Ito) 

TOKYO -- The yield on benchmark 10-year Japanese government bonds has slipped into negative territory for the first time in two weeks as signs of slowing global economic growth send investors rushing to haven assets.

Long-term interest rates have been under pressure amid expectations that the Bank of Japan will lower its inflation forecasts at a two-day policy meeting that ends Wednesday, which would suggest the central bank's ultraloose monetary policy will remain in place even longer.

Yields on newly issued 10-year JGBs dropped 0.01 percentage point, or 1 basis point, on Tuesday from the previous session to touch minus 0.005%. Rates for 20-year and 30-year debt also declined.

The rise in bond prices, which move inversely to yields, was triggered Monday by the International Monetary Fund, which trimmed its global economic growth outlook for this year 0.2 percentage point to 3.5%.

The same day, China announced its economy grew 6.6% in real terms last year, marking the slowest pace in 28 years. These two reports sent investors buying JGBs, considered to be a safe haven.

With uncertainty growing over the economic outlook, the bond market is watching for dovish pronouncements from BOJ Gov. Haruhiko Kuroda, said Naka Matsuzawa, chief Japan rates strategist at Nomura Securities. BOJ policymakers are expected to hold monetary policy steady at their current meeting. But "there is a chance Gov. Kuroda will hint at a direction toward additional easing," said Eiji Dohke, chief bond strategist at SBI Securities.

The Japanese central bank is expected to downgrade its inflation outlook for fiscal 2019 to around 1%, down from a 1.4% projection issued last October. The downgrade partly reflects weaker petroleum prices.

A forecast that places the 2% inflation goal further out of reach would all but guarantee longer monetary easing. That, in turn, would lend support to JGB buying by diminishing the risk of rising interest rates.

"Japan's long-term rates will hover near zero, going back and forth between negative and positive for a while," said Keiko Onogi, senior JGB strategist at Daiwa Securities, echoing a widespread view.

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