MNI INSIGHT: BOJ Doesn't See JGB Yield Spike, Eyeing Auctions

--BOJ Sees Investor Demand Smoothing any Future Spike in Yields

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan believes its own front-loaded buying and

attractive investment rates for life and pension funds will prevent a sharp rise

in JGB yields over coming months, even as government issuance increases, MNI

understands.

     With the increased auctions just getting underway, policymakers are aware

that markets may have misunderstood the bank's actions over the last month or

so, with some investors of the view the BOJ is falling short in its promise to

match issuance with purchases.

     But the BOJ points to the fact it has increased its bond buying since

April, paving the way for the flood of bonds coming from Japan's Ministry of

Finance.

     MOF has increased its bond issuance for the current fiscal year by JPY59.5

trillion following a second supplementary budget, with an increase in auction

sizes across the maturity spectrum. The BOJ has, by-and-large, increased the

size, if not frequencies, of its bond-buying operations to match the new sale

schedule.

     The one bucket of operations that didn't see an increase announced for July

was the longer-end of the curve, with BOJ officials noting that the size of

issuance was little changed in that sector if the curve. This in part reflects

the fact the bank would tolerate modestly higher yields at the longer-end of the

curve, but it certainly isn't trying to engineer such a move.

     --FOREIGNERS NET SELLERS

     BOJ officials are also watching foreign investors, who have been net

sellers of JGBs over recent weeks, and what impact that has had on yields. There

has been anecdotal evidence of offshore accounts switching out of JGBs into U.S.

Treasuries - partly for a yield pick up and partly to ensure dollar liquidity in

their portfolios.

     The MOF is expected to further increase its bond issuance later in the

fiscal year, as it looks to to cover the drop in tax revenues, with a third and

possibly even a fourth supplementary budget needed.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$A$$$,M$J$$$,MI$$$$,MT$$$$,MX$$$$,M$$FI$,MGJ$$$]