TOKYO, June 1 (Reuters) - Japanese government bond prices fell on Friday after the Bank of Japan unexpectedly trimmed its buying of government bonds for the first time in three months.
Many market players expected the BOJ eventually to reduce the scale of its massive bond buying, since it now holds more than 40 percent of the market, but the timing was a surprise given the volatility in global markets caused by the Italian political crisis.
“Many had thought the BOJ would have to reduce buying at some point. So in that sense, no one is talking up a dramatic narrative that today’s move is a step towards an exit,” said Naomi Muguruma, senior strategist at Mitsubishi UFJ Morgan Stanley Securities.
The BOJ has been reluctant to reduce its bond purchases after a small cut in its February bond buying was interpreted as a move towards an eventual exit from its stimulus, sparking an unwanted strengthening in the yen.
On Friday, the BOJ trimmed its buying in JGBs with five to 10 years left to maturity to 430 billion yen, 20 billion yen less than the 450 billion yen worth it had been buying since late February.
The BOJ buys those maturities six times a month, meaning it had soaked up 2.7 trillion yen worth per month. That is 500 billion yen more than 2.2 trillion yen of 10-year JGBs the Ministry of Finance sells each month.
The BOJ’s massive bond buying has led to scarcity of bonds for market participants to trade among themselves.
That illiquidity has reached the point where no benchmark 10-year JGBs were traded on Monday and Thursday this week.
“This has become a bond market where a benchmark issue had no trade when so many things are happening around the world. There was clearly a problem in terms of market function,” said Muguruma at Mitsubishi UFJ Morgan Stanley Securities.
Ten-year JGB futures fell 0.13 point to 150.84.
The 10-year JGB yield rose 1.5 basis points to 0.045 percent.
The 20-year JGB yield rose 1.0 basis point to 0.515 percent while the 30-year JGB yield rose 1 basis point to 0.72 percent. (Reporting by Hideyuki Sano Editing by Eric Meijer)