Japan 3-month govt bill yield falls to zero percent as BOJ mops them up

TOKYO, July 4 Fri Jul 4, 2014 2:28am EDT

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TOKYO, July 4 (Reuters) - The yield on three-month Japanese government discount bills fell to zero percent on Friday for the first time since late 2005, on fears that short-term bills could disappear from markets as the Bank of Japan vacuums them up to facilitate its asset purchases.

The benchmark three-month yield suddenly dropped 2.9 basis point, a sizable move in Japanese money markets where most products yield 10 basis points (0.1 percent) or less.

"There has been talk that the bills yield could fall to zero or even negative. I wouldn't be surprised if it falls below zero," said Katsutoshi Inadome, strategist at Mitsubishi UFJ Morgan Stanley Securities.

Previous episodes where the yield on government bills fell to zero often took place during financial crises, when investors rushed to the safety of government debt.

But with Wall Street shares at record highs, no investor was buying government bills for such a purpose.

Still, traders fear there could be a shortage of short-term bills available to investors, who need to park a certain amount of money in liquid government bills as a substitute for cash.

The BOJ has been buying a large amount of short-term bills and other government debt to pump money into markets as a part of its campaign to kick-start the economy.

The BOJ's holding of Treasury Bills rose to around 34 trillion yen at the end of June, more than doubling from 16.4 trillion yen in March last year, just before the BOJ started its massive asset purchase scheme.

The BOJ, which is already holding 27 percent of the total bill issues, is expected step up its buying in bills as another major tool the central bank uses to pour funds into markets is increasingly unpopular.

Its fund-supplying operation hardly attracted bids in recent months because no banks need to borrow funds from the BOJ, thus forcing the BOJ to rely on buying in government bills.

In April last year, the BOJ committed to almost double the monetary base -- the amount of money it provides to the economy -- in two years by around 132 trillion to around 270 trillion yen.

Under that scheme, the BOJ plans to increase its long-term bond holdings by 100 trillion yen.

It needs to provide another 32 trillion yen through other channels, including small buying in stock ETFs (Exchange Traded Funds), but many money market players think buying short-term bills is the only major option to fill the gap. (Editing by Kim Coghill)

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