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JGBs lower as MOF and BOJ share economic optimism

TOKYO: Key June 10-year Japanese government bond futures ended lower on Friday after the Bank of Japan released an upbeat economic assessment and government officials expressed confidence in the prospects for recovery. Finance Minister Kiichi Miyazawa said the economy was clearly starting to emerge from recession while the Bank of Japan slightly upgraded its appraisal of corporate investment in its monthly report for March.

Upgrades in private economists' forecasts for Japan's gross domestic product in the last quarter of last year, after a smaller than expected fall in corporate capital spending data released on Thursday, were also hurting JGBs, traders said.

"There is a growing view that GDP won't be as bad as initially expected," said a senior trader for a Japanese trust bank.

The median forecast of 19 economists polled by Reuters on Japan's October-December 1999 GDP rose slightly, to a quarter-on-quarter contraction of 1.0 percent from a 1.1 percent fall predicted by the same economists last week.

The revision followed a Finance Ministry survey showing that Japanese firms cut capital spending by a smaller-than-expected 0.7 percent in the last three months of 1999 from a year earlier.

JGBs recovered slightly in the afternoon on a Jiji news agency report that the central bank was considering making medium-term JGBs eligible for its outright bond buying operations.

But such gains were short-lived, as BOJ officials later said the central bank were not considering whether to make medium-term JGBs eligible for the outright bond buying operations.

June JGB futures: ended at 131.00, down from a close on Thursday of 131.39. Turnover was 51,265 lots.

The yield on 219th 10-year JGBs stood at 1.815 percent, up from 1.785 percent late on Thursday. JGB traders said a quarterly GDP fall of around one percent has already been priced into the market, although some said there was speculation that the figure may not be that bad after all. "If the GDP figure comes out strong, the upside of the JGB market will be capped and the range of the benchmark yield could rise to between 1.8 and 2.0 percent (from between 1.7 and 1.9 percent)," another trust bank trader said.

Japan's October-December GDP data will be released at 8.50 a.m. on Monday (Sunday).

"It is true that there are a large number of traders who are bearish on JGBs," said the first trust bank trader.

But demand for JGBs among investors such as life insurers and the low probability of a scrapping of the Bank of Japan's zero interest rate policy before the end of the year make sharp declines in JGBs unlikely in the near term, he said.

Besides the GDP data, traders are focusing on BOJ Governor Masaru Hayami's regular news conference at 5 p.m.

The BOJ left the projected net fund surplus in the money market at 1.0 trillion yen after its operation, unchanged from on Thursday. -Reuters