Japan aims to calm bond market jitters

The Japanese ministry of finance yesterday sought to calm jitters in the government bond market by pledging it would not sell its holdings of JGBs soon.

The pledge came as the yield on 10-year JGBs rose to 2 per cent for the first time since the middle of February. The yen is also hovering at a 7-month high against the US dollar, trading yesterday near the $1/Y111 level.

The ministry's insistence that its Trust Fund Bureau would not sell JGBs followed a warning from the state-owned postal savings and life assurance system that it expected to see a net outflow of Y31,000bn ($279.28bn) of deposits in the next three years.

That caused alarm in the bond market because the postal savings system is one of the biggest holders of JGBs.

Bond yields hit a low of 1.3 per cent in mid-May but have been rising quickly since on fears that the system might become a forced seller of its holdings to meet the expected withdrawals by depositors.

Analysts in London were sceptical about any firm promise that the Trust Fund Bureau would not begin selling JGBs. Its announcement late last year that it would no longer be a buyer of bonds caused a sharp rise in JGB yields.

Rising bond yields have sparked fears of higher long-term interest rates in Japan, which some economists fear could kill tentative signs of an economic recovery. They have also raised concerns about the outlook for some Japanese life assurance companies, which are large holders of JGBs.

The deteriorating performance of the bonds could also spell a downturn in the stock market, which is surging as foreign investors flock back into Japanese equities.

The Nikkei average fell 1.3 per cent yesterday as a bout of profit-taking set in following sharp gains accumulated last week. But share prices are still up 30 per cent so far this year.

The Japanese government has insisted in recent days that it will take any steps it believes necessary to avoid a repeat of the bond market turmoil seen earlier this year.