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JGBs brush off tax hike delay, but risk of rising rates looms

TOKYO -- The Japanese government bond market remained calm Wednesday, but this could change as the government's decision to again push back a planned consumption tax hike has left Japan's road map to fiscal health less clear.

Yields on 10-year JGBs rose just 0.5 basis point to minus 0.115%, not far from the record low of minus 0.135% touched in March.

The Bank of Japan's massive quantitative monetary easing program, which includes 80 trillion yen ($730 billion) in annual JGB buying, continues to exert strong downward pressure on long-term rates. But concerns about Japan's fiscal health likely will rise. Furthermore, the central bank will need to exit its quantitative easing program eventually. "The risk that long-term rates will rise in the future is growing," said Mana Nakazora, chief credit analyst at BNP Paribas Securities (Japan).

Interest rates have grown more sensitive to flows of foreign money. Overseas investors' JGB holdings reached 109 trillion yen at the end of 2015, nearly doubling in five years. "Money from abroad could flee if Japan's finances keep deteriorating," warned Hajime Takata, chief economist at the Mizuho Research Institute.

In the stock market, the Nikkei Stock Average closed lower for the first time in six trading days, sinking more than 300 points at one point. Profit-taking surged ahead of the official announcement of the tax hike delay. "If credit ratings on Japan's sovereign debt are downgraded, Japanese companies' dollar procurement costs would rise, and this could have a negative impact on their earnings," said Hiroshi Matsumoto of Pictet Asset Management (Japan).

(Nikkei)

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