SINGAPORE/HONG KONG :Japan's government bond market is being pushed to breaking point in a contest between foreign speculators and the Bank of Japan, creating challenges for loan pricing and bond sales and raising the prospect of government financing tangles down the track.
"If you lose the function of the futures market, that's a huge problem for auctions - you cannot really hedge your auctions ... dealers will all go away," said Naka Matsuzawa, a strategist at Nomura in Tokyo. "The BOJ doesn't really have to do anything, it has cover for not doing so and nothing is going to force its hand," said Ian Samson, a portfolio manager at Fidelity.
The BOJ concludes a two-day meeting on Friday with no changes expected but with government and other sources saying that further yen declines could prompt a response.The trigger for Wednesday's rollercoaster ride was the BOJ's surprise buying at the seven-year tenor. "Now that the function of the futures is in question they needed to shut their positions right away," Nomura's Matsuzawa said of investors or dealers using futures as a hedge.
"If that isn't working, that should be bad for the financial market as a whole," said Deutsche Bank's Japan economist Kentaro Koyama.