Mizuho Securities Co. said Bank of Japan dominance has killed the nation’s sovereign bond market, leaving it unable to reflect either the success of stimulus policies or fiscal risks.
Monthly trading of Japanese government bonds among the biggest holders including banks and insurers shrank to 37.9 trillion yen ($385 billion) last quarter, the least on record going back to 2004, according to Japan Securities Dealers Association data. Totan Research Co. and Spiro Sovereign Strategy also said BOJ monetary stimulus is cutting the tie between economic fundamentals and bonds, which yield 0.6 percent for 10 years, the least in the world.
“The JGB market is dead with only the BOJ driving bond prices,” said Tetsuya Miura, the chief bond strategist at Tokyo-based Mizuho, one of the 23 primary dealers obliged to bid at government auctions. “These low yields are responsible for the lack of fiscal reform in the face of Japan’s worsening finances. Policy makers think they can keep borrowing without problems.”
Even with a planned sales-tax increase in April, Japan’s government has yet to present detailed proposals on how to consolidate its finances, the International Monetary Fund said last month. The BOJ’s decision last week to press on with unprecedented bond buying helped cut the five-year JGB yield to an almost seven-month low of 0.19 percent, below the 2 percent inflation rate that central bank Governor Haruhiko Kuroda said is likely to be achieved in 2015.
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