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Friday, 28 November 2014

Japan bond yield goes negative as BOJ faces oil threat

The Bank of Japan building is pictured in Tokyo March 18, 2009. REUTERS/Yuriko Nakao

(Reuters) - Japanese government bonds traded at a negative yield for the first time ever on Friday, thanks to the Bank of Japan's massive asset-purchase scheme as it seeks to stoke inflation and revive an economy that slipped into recession in the third-quarter.

The BOJ's task got even stiffer this week as a plunge in oil prices threaten its 2 percent price goal, meaning the central bank could be forced to expand its stimulus further, soaking up more debt paper and spreading negative yields to longer-dated maturities.

The two-year JGBs traded at the yield of minus 0.005 percent JP2YTN=JBTC. Negative yield is an unusual, but not uncommon occurrence - record-low interest rates in Europe, for instance, have flipped bond investing on its head with Germany and Switzerland seeing negative yields.

Friday's milestone in Japan is a side-effect of the BOJ's resolve to spark credit growth and get the wheels of commerce turning via its quantitative and qualitative asset-purchase scheme.

The asset purchases have crushed debt yields, with those on government discount bills turning negative in September.

The central bank last month stunned markets by expanding its monetary easing program, just weeks before data showed the world's third-biggest economy had unexpectedly slipped back into recession in the third quarter.

Now, the plunge in oil prices raises fresh complications for the BOJ, which has pledged to lift inflation to its two percent target by the next fiscal year.

Oil sank more than six percent on Thursday following OPEC's decision not cut output, and is down more than 35 percent from their peak in June, a development that looks set to bring down Japan's consumer price inflation in coming months.

"Japan's core consumer price is likely to fall to around 0.5 percent by March," said Junichi Makino, chief economist at SMBC Nikko Securities.

Makino was referring to the core CPI excluding the impact of a sales tax hike in April, which the BOJ is tracking closely. Data published on Friday showed core inflation stripping out the tax effect at around 0.9 percent.

"The BOJ will likely be forced to take additional easing steps by April," Makino said.

Many market players expect negative yields could gradually spread to longer maturities as in some European countries.

In Germany three-year bonds are traded below zero and in Switzerland, even five-year bonds are traded at negative yield as they fight threats of deflation.

Reference: Hideyuki Sano

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