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JGBs end firm, BOJ seen keeping Y1.0 trln surplus

TOKYO: Key March 10-year Japanese government bond futures ended firmer on Tuesday as dealers bought back short positions taken earlier for hedging purposes.

Dealers also reported buying of long-term JGBs by investors including public funds, while medium-term bonds lagged 10-year issues after a six-year bond auction was met with caution.

In the money market, the Bank of Japan brought down the fund surplus to the familiar 1.0 trillion yen.

That was the level which the market had gotten used to before the BOJ began raising the surplus toward the end of December in response to concerns about the millennium bug.

Money dealers said the BOJ was likely to keep the fund surplus at 1.0 trillion yen for the time being, as reducing the surplus could be viewed by market players as a precursor to the end of the BOJ's zero interest rate policy.

They said investors' wariness was reflected in the somewhat disappointing results of the Finance Ministry's auction of 1.0 trillion yen worth of 1.3 percent six-year bonds on Tuesday.

The MOF said the auction of six-year bonds produced a lowest price of 99.95 and an average price of 100.00.

"The market expectation was 99.98 for the lowest price and 100.01 for the average price, so the outcome was just slightly below expectations," said Toshio Aoki, strategist at Tokai International Securities.

March JGBs ended at 132.78, up from Monday's close of 132.40. Turnover was a healthy 44,338 lots.

The yield of the key 219th 10-year JGB stood at 1.745 percent, down from 1.780 percent late on Monday. By comparison, the 1.3 percent 34th six-year JGB offered through an auction in October was last traded at 1.280 percent against 1.285 percent late on Monday. Key TIBOR-based September three-month euroyen futures settled at 99.605, up from Monday's 99.570 settlement.

"Euroyen futures are discounting the likelihood that BOJ Governor (Masaru) Hayami will take care not to re-ignite speculation of a scrapping of the bank's zero interest rate policy in his speech on Wednesday," said a trader for a foreign investment trust.

"To do so now, so close to a G7 meeting is risky, as it may invite speculation that the BOJ's views on monetary policy differ from the government's stance" and spur yen buying, the trader said.

Comments by government officials helped reinforce the market's view that the BOJ has little choice for now but to temper speculation of a scrapping of its accommodative monetary policy.

Vice Finance Minister for International Affairs Haruhiko Kuroda told Reuters in an interview on Tuesday that the BOJ's monetary policy was appropriate, and that there was no gap with the MOF on economic policy.

Kuroda said Japan's economy was not yet strong enough for the BOJ to end its zero interest rate policy.

Earlier, Finance Minister Kiichi Miyazawa said he does not think the government would be able to make the judgment during fiscal 2000/01 that the economy is on a cycle of positive growth.

Miyazawa also said he did not expect personal spending to show growth in the gross domestic product data for the October- December period.

Japan's October-December GDP data is expected to be released sometime in March. -Reuters