JGBs slip as Shirakawa cools rate cut expectations

By Rika Otsuka

TOKYO, April 9 (Reuters) - Japanese government bonds slid on Wednesday after the upper house of parliament approved acting Bank of Japan Governor Masaaki Shirakawa as the central bank's head, cooling expectations for an interest rate cut this year.

The agreement to keep Shirakawa, currently a deputy BOJ governor and acting chief of the central bank, in the job brought an end to the first leadership vacuum at the top of the BOJ in 80 years. [ID:nT209700]

"Shirakawa is known for his close analysis on the economy," said Tetsuya Miura, bond strategist at Shinko Securities.

One can easily guess the BOJ will stand pat for a while given Shirakawa's reputation that he pays deep respect to economic fundamentals in policy-making, while he is unlikely to yield to any external pressure, Miura said.

"It's no surprise that expectations for a BOJ interest rate cut are pushed back," Miura said.

Trading activity was subdued as investors braced for comments from Shirakawa at a news conference after the BOJ concludes a two-day policy meeting on Wednesday. The central bank is widely expected to keep interest rates on hold at 0.5 percent.

One focus of the meeting is a possible discussion on how much the BOJ may need to cut its economic forecast in a twice-yearly outlook report due out later this month.

June 10-year futures were down 0.04 point at 139.73 2JGBv1.

The benchmark 10-year JGB yield rose 1.5 basis points to 1.340 percent JP10YTN=JBTC, staying above a three-year low of 1.215 percent struck last month.

"The benchmark yield is unlikely to fall below 1.2 percent due to fading rate cut expectations," Shinko's Miura said.

Swap contracts on the overnight call rate show the implied chance of a rate cut by the year-end is roughly 40 percent JPONIBOJ=TRDT, down from around 55 percent a week ago.

A fall in rate cut expectations hurt shorter-dated notes, the most sensitive to any change in the monetary policy outlook.

The two-year yield was up 1.5 basis points at 0.585 percent JP2YTN=JBTC.

The five-year yield climbed 1.5 basis points to 0.815 percent JP5YTN=JBTC as some market players sold the midterm sector ahead of Thursday's five-year JGB auction.

The 20-year yield edged up 0.5 basis point to 2.055 percent JP20YTN=JBTC.