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By Takaya Yamaguchi and Takashi Umekawa
TOKYO, March 17 (Reuters) - Japan’s Ministry of Finance may reduce its issuance of inflation-linked Japanese government bonds in the next fiscal year, two government sources said, as inflation expectations have been hit by the coronavirus outbreak and a market selloff.
The ministry will discuss the idea next week with primary dealers including banks and brokerage firms, said the sources, who declined to be identified because the plan is not yet public.
The next scheduled issuance in May will likely be cut from a planned 400 billion yen ($3.8 billion) to 300 billion yen, they said.
The yield spread between a nominal bond and an inflation-linked bond, called the breakeven inflation (BEI) rate, is widely seen as a measure of investors’ inflation expectations. It has dived as global stock prices have plunged during the coronavirus outbreak.
The BEI of 10-year JGBs tumbled to about -0.001% at the end of February, compared with about 0.168% at the beginning of the year, according to data provided by Japan Bond Trading Co Ltd.
Japan’s core consumer inflation has fallen to less than 1% in recent months despite stimulus efforts by the Bank of Japan.
The finance ministry is also considering whether to resume a buy-back programme for inflation-linked bonds to improve the balance of supply and demand, said the sources.
The number of coronavirus cases in Japan has surpassed 1,500, including those from a cruise ship, and killed some 35 people. The crisis has also cast doubt on the viability of the 2020 Summer Olympic Games in Tokyo, although the government has repeatedly said the Games will go ahead as planned. ($1 = 106.4800 yen) (Reporting by Takaya Yamaguchi and Takashi Umekawa; Editing by David Dolan and Richard Pullin)