Japanese government bond (JGB) yields soared to one-week highs on Tuesday on firmness in Tokyo shares, shrugging off a surprise monetary easing by the Bank of Japan.
After a two-day board meeting, the BOJ enhanced what it calls its "quantitative easing", saying it would raise its fund provision to the banking system to 30-35 trillion yen ($280-326 billion) from the current 27-32 trillion yen.
The central bank hopes that, by flooding the money market with cash and forcing short-term interest rates to stay around zero, the funds will be lent to companies and households, galvanising the economy and putting an end to deflation.
But the bond market showed limited response as most Japanese government bond players know the policy framework, adopted in early 2001, has had little effect on the economy.
The BOJ has gradually raised its fund target from five trillion yen in March 2001, but Japanese bank lending has fallen for six straight years as banks are still keen to slash their bloated lending - a legacy of Japan's asset bubble a decade ago.
"Bond market players know the policy is meaningless," said Koji Ochiai, chief strategist at Nochu Securities. "Today's BOJ decision only shows that the bank has no plan to end its quantitative policy even though the economy is recovering."
Market players said Japanese government bonds were largely hit by surging Japanese shares. The Nikkei stock average rose 0.61 percent to 11,103.10, closing in on its 16-month peak of 11,238.63 hit in October.
The benchmark 256th 10-year Japanese government bond yield rose 5.5 basis points to 1.340 percent, its highest in more than 10 days and 8.5 points above its one-and-a-half-month low of 1.265 percent hit on Friday.
The benchmark five-year Japanese government bond yield rose 3.0 basis points to 0.555 percent and the benchmark 20-year yield gained 4.5 basis points to 1.850 percent.
The price of key 10-year Japanese government bond futures for March delivery was down 0.44 point at 138.44, its lowest in a week.
But dealers remained optimistic about Japanese government bonds, reckoning Japanese banks were ready to buy the bonds on dips ahead of their book-closings in March.
"If bank lending increases, there will be fewer funds for them to buy Japanese government bonds. But such a move has yet to take off and banks still have plenty of cash for Japanese government bonds," said Naoki Suzuki, strategist at Dresdner Kleinwort Wasserstein.
Traders also said the auction of 1.0 trillion yen of 15-year floating-rate Japanese government bonds on Tuesday was overheated due to buying by Japanese banks.
The coupon on the floater was set at 75 basis points below the base rate, compared to market expectations of around 70.
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