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Japan long-term interest rates disappear ... for a day and a half

BOJ policy leads investors to shun benchmark 10-year JGBs

The Bank of Japan's headquarters in Tokyo

TOKYO -- From the morning of May 1 to the following afternoon, there was no trading of newly issued 10-year Japanese government bonds -- something anomalous in financial markets. Anomalous because the 10-year bonds are the most widely traded JGBs on the market, with the yields used as a benchmark for long-term interest rates. But nobody was buying. In theory, this could be detrimental to economic activity, as lenders would not know how much to charge.

"We've got nothing to do. We've just been chatting about which financial institutions are more attractive to new grads," lamented one bond dealer at a Japanese securities company on Monday.

The fact that Monday and Tuesday fell just before Japan's Golden Week public holiday did not help; some investors simply took both days off to get a rare entire week's break. But at the heart of the matter is the Bank of Japan.

The cornerstone of the BOJ's quantitative and qualitative monetary easing program, started in April 2013, was its aggressive purchase of JGBs to lower interest rates. This was done in the hope of corporations borrowing more from commercial banks to increase business activity, boosting the economy and moving the central bank closer to achieving its 2% inflation target. But it also sucked JGBs out of the market, making trading in the bonds difficult. The BOJ changed tack in September 2016 and moved to fix long-term interest rate at around 0%, which made trading the 10-year JGBs more unattractive.

Trading eventually resumed in the afternoon of May 2, with yields standing at 0.015%. But there is no denying that something extraordinary is taking place in the bond market; no trading in 10-year JGBs was unheard of before Kuroda and co's monetary easing program.

No matter how much an investor wants to buy or sell, they can do nothing in a market with no activity. Whether it can even be called a market is a matter of opinion.


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