* BOJ easing has not changed investor inflation expectations
* BOJ sees inflation reaching 2 pct in 2015; market does not
* Impact of weaker yen seen wearing off next April
* Japan investors keep buying yen bonds, no major asset
* Banks starting to rebuild bond portfolio
By Hideyuki Sano
TOKYO, Nov 6 Six months after the Bank of Japan
adopted an unprecedented scale of monetary stimulus to end
stubborn deflation, the shock therapy has not yet changed
Japanese investors' own stubborn mindset that the country is
stuck in a deflationary trap.
Many Japanese banks and life insurers have piled into
Japanese government bonds, sending the benchmark 10-year yield
below 0.6 percent last week, even as the
country's consumer inflation steadily rises.
In an economic outlook report published last week, the BOJ
stuck to its forecast that core inflation would rise near 2
percent in 2015/16, excluding the impact from a sales tax
"More than 90 percent of market players think that is not
going to happen," said Hidenori Suezawa, analyst at SMBC Nikko
To be sure, Japan's inflation has risen in line with the
central bank's projection so far since April, when the BOJ
announced a two-year asset purchase plan to double its holding
of bonds and some other assets.
Core inflation was at a five-year high of 0.8 percent in
August and stood at 0.7 percent in September, well above March
when core prices fell 0.5 percent.
But the uptick was driven mostly by rising import prices
following a sharp fall in the yen in November-May.
One problem for Bank of Japan Governor Haruhiko Kuroda,
investors say, is that a boost from a weaker yen will wear off
Just to maintain the current level of inflation will likely
require another yen fall of the same magnitude, meaning the yen
will need to fall to around 120 per dollar from around 100 now.
In the latest Reuters poll, however, the mean forecast for
the yen a year ahead is 107, with even the most bearish response
Domestic consumption is not seen strong enough to boost
prices as wages are still stagnant - something fund managers at
Japanese firms can tell even without looking at government data.
The upshot is most Japanese institutional investors are
still ready to buy JGBs even as the 10-year yield falls below
Most of Japan's biggest life insurers said they increased
domestic bond holdings in April-September and that they plan to
increase them further.
There was no major reallocation of funds despite speculation
the BOJ's massive easing could spark "portfolio rebalancing" to
foreign bonds by Japanese investors.
Japan's biggest banks, which initially sold a large amount
of bonds on inflation fears, have started rebuilding their bond
"Bank lending is not growing that much so they have cash at
hand. In the past, banks were selling into the BOJ's buying. Now
both of them are buying, that's why JGB yields are falling,"
said Tadashi Matsukawa, head of fixed income investment at
PineBridge Investments in Tokyo.
BOJ data shows city banks - the country's top lenders -
increased JGB holdings in August for the first time since March
to 85.44 trillion yen ($867 billion) from 85.38 trillion yen in
July, after having slashed them by 22 trillion yen since March.
In a sign banks are becoming less eager to sell JGBs, the
BOJ's latest buying in JGBs with 5 to 10 years to maturity drew
the smallest offers in recent months.
The BOJ's offer on Thursday to buy 400 billion yen of JGBs
in those maturities attracted offers of 939.7 billion yen, the
first time offers did not reach one trillion yen.