* Yield drops on expectations that a Kuroda-led BOJ would
* BOJ still has tools to control credit expansion-strategist
By Lisa Twaronite
TOKYO, Feb 25 The yield on the five-year
Japanese government bond tumbled to another record low on
Monday, and many market participants say further moves down are
likely in light of rising expectations for more drastic easing
steps from the Bank of Japan.
While long-term rates could eventually rise if the easing
shows signs of actually whipping deflation and achieving the
BOJ's 2 percent inflation target, short- and medium term rates
could remain anchored at rock-bottom levels as long as the
central bank remains committed to buying JGBs.
The five-year yield dropped 1 basis point to
0.120 percent, the lowest recorded since Japan started issuing
5-year bonds in 2000, after sources said monetary easing
advocate Haruhiko Kuroda will be tapped as the next central bank
The five-year tenor began its push into uncharted record-low
territory last month, on expectations the BOJ will eventually
increase the time left to maturity of JGBs bought in its asset
purchase programme, which now stands at three years.
The central bank is also likely to consider scrapping
interest it pays on banks' excess reserves as part of future
policy steps aimed at beating deflation. Expectations of this
have also pushed down rates in the short- and medium-term
"Ten basis points is probably the floor for now, but if the
new governor decides to cut interest on reserves, then there
might be a chance for the five-year to go lower," said Le Ngoc
Nhan, a strategist at Morgan Stanley MUFG Securities in Tokyo.
As the BOJ can use the interest on reserves as a tool to
control short-term rates as it sees fit, it still has that
weapon in its arsenal if the low rates were ever to fuel a
credit bubble, Nhan said.
The BOJ can simply raise the interest on reserves and
effectively control credit expansion -- and inflation -- no
matter how much its balance sheet expands.
"There are some risks out there, but it's not something we
should be concerned about in the near term," Nhan said.
"You don't need to shrink the balance. If people can lend to
the central bank at a higher rate, they don't need to lend to
the private sector."
In the meantime, market participants continued to buy
five-year JGBs, even at such low yields, since there is little
risk in holding the notes. As long as this is the case, the
five-year yield faces a yawning chasm of possibly offering no
return to investors.
"Theoretically speaking, it [the five-year yield] could go
as low as zero percent," said Naomi Muguruma, senior strategist
at Mitsubishi UFJ Morgan Stanley Securities.
She noted that the scenario has changed since the last time
five-year yields were at a then-record low of 0.145 percent in
That plunge was partly due to hopes that new BOJ governor
Toshihiko Fukui would aggressively ease, and it set the stage
for a correction back above 1 percent just three months later. A
similar sudden spike in yields is much less likely now, with the
central bank already buying assets and committed to buying even
The BOJ has already pledged to pump 101 trillion yen ($1
trillion) into the economy by the end of this year through its
asset purchases and lending programme, and will shift to
open-ended purchases from 2014.
"The main tool then [in 2003] was BOJ's lending to the
private sector, not the outright JGB purchase," Muguruma said.
"This time, the main tool for the BOJ's expansion of the balance
sheet is outright JGB purchases, which directly tightens
supply/demand conditions in the JGB market."