Short-term JGB yields fall as cooling inflation reduces BOJ rate hike pressure

TOKYO: Short-term Japanese government bonds (JGBs) rose on Friday, sending yields lower, after data showing cooling inflation reduced the urgency for early rate hikes by the central bank.

Long-term JGBs were poised for a weekly gain as consensus built that Prime Minister Sanae Takaichi’s sweeping electoral victory earlier this month would allow her to keep to a pledge of “responsible” stimulus.

The two-year yield, the one most sensitive to Bank of Japan policy rates, decreased 0.5 basis point (bp) to 1.25%.

The five-year yield slid 2.5 bps to 1.605%. Yields move inversely to bond prices.

Japan’s annual core consumer inflation hit 2.0% in January, marking the slowest pace in two years, data showed.

That’s in line with the BOJ’s projection that inflation will briefly slow below its 2% target.

Long-term JGB yields surged to record highs last month as concerns about Japan’s fiscal health swelled after Takaichi, a fiscal dove, called a snap election and pledged to cut sales taxes on food for two years.

But a measure of calm has returned to the market in recent weeks, with yields falling and resilient demand seen in JGB auctions.

“It may be that Japan’s one-party dominance system is attracting global attention amid political instability in major developed nations, thereby stimulating demand from investors who previously showed little interest in JGBs,” Ataru Okumura, a senior strategist at SMBC Nikko Securities, said in a report.

The benchmark 10-year JGB yield fell 5 bps to 2.090%.

Longer-dated securities had yet to trade but were poised for steep declines this week.