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JGBs end lower on stock rally, optimistic tankan

TOKYO: Key June 10-year JGB futures eased on Monday, pushed lower by Japanese stock gains after a widely watched central bank quarterly survey showed Japanese companies were more optimistic about business conditions.

The initial reaction to morning release of the Bank of Japan (BOJ) "tankan" survey was to cover short positions in June futures as the figures were seen suggesting that the economy was getting better, but not strong enough to induce the central bank to scrap its zero-rate policy anytime soon.

"The 'tankan' was actually stronger than expected, especially in how the firms regard capital spending. The stock market was supported by this, and the JGB market eased in reaction (to share prices)," said Kazuhiko Sano, chief strategist at Daiwa SBCM.

June JGB futures: ended at 131.30, down 0.20 point from on Friday's close and off its 131.94 intra-day high.

Activity in the cash market was rather subdued, with the yield on the key 10-year 221th JGB at 1.785 percent against 1.775 percent late on Friday.Some dealers said selling of long-term government bonds was spotted in afternoon trade.

The general market feeling was that the "tankan" results were roughly within expectations and that no drastic changes in bond future prices were seen in the near term.

"Overall the (tankan) results are not strong enough to heighten speculation about a near-term BOJ credit-tightening, and will not discourage investors from buying JGBs on dips," said Seiji Shiraishi, senior economist for Daiwa Research Institute.

Daiwa SBCM's Sano said he expected the range of the June futures contract to remain between 131.00 and 132.20 yen during the week, with some downward bias if the stock market remains strong.

Japanese stocks began the new business year on a strong note, with the 225-issue Nikkei index rising nearly two percent.

The "tankan" sentiment index for major manufacturers came in at minus nine, up from minus 17 in the December tankan. This was the fifth consecutive quarter in which large firms were more optimistic about their business prospects.

The index is arrived at by subtracting the percentage of companies which foresee a worsening of business prospects from the percentage which foresee improvement. A negative number indicates that a majority of companies expect business conditions to worsen.

Bond dealers noted that the index for big manufacturers is expected to improve to minus five in the June survey. The market had expected a positive figure.

In the March tankan, large companies said they expected to reduce spending on plant and equipment by just 0.6 percent in the new business year after slashing such investment the past two years. The BOJ has said improvement in capital spending is key to when the central bank decides to end its 13-month-old zero-rate policy.

Traders said JGBs on Monday were also supported by the yen's recent strength against the dollar and euro, and investor demand strengthened on news Prime Minister Keizo Obuchi was hospitalised on Sunday after suffering a stroke. Obuchi has been a proponent of expansionary fiscal policies.

Finance Minister Kiichi Miyazawa said he was not at all concerned that Obuchi's hospitalisation would disrupt government management of economy.

Bankers said the BOJ intervened to buy dollars for yen soon after the "tankan" was released, which pushed the dollar to a high of 105.30 yen, up more than three yen from on Friday's low of 102.03 yen. The dollar stood at 105.19/29 yen.

But if the yen strengthens again, it may fuel speculation that Japan may pledge to maintain its zero-rate policy in exchange for international cooperation on foreign exchange, when Group of Seven finance ministers meet in Washington in mid-April, traders said.

Elsewhere, an auction of 2.7 trillion yen in two-month financing bills (FBs) produced a lowest price of 99.989, with 42.0989 percent of the bids accepted at that price.

Analysts said the result of the first auction of two-month paper drew enough demand and brought no surprises, since volume of short-term paper is usually increased at the beginning of a fiscal year to meet seasonal needs.

The Finance Ministry said it will auction 2.0 trillion yen of two-month FBs next on Monday.

The BOJ drained 1.5 trillion yen from the money market operation and 700 billion yen operation.

As a result, traders said the projected fund surplus fell to around 11.3 trillion yen from 17.7 trillion yen late on Friday.-Reuters