2016.09.1602:13:00UTC+00Japanese Bonds Little changed As Investors sidelined ahead of Boj, fED Policy Meetings

The Japanese government bonds remained little changed Friday during a relatively quiet session that witnessed data of little significance. Also, investors were sidelined ahead of the long weekend, focusing on the Bank of Japan and Federal Reserve’s monetary policy decision scheduled to be held next week.

The benchmark 10-year bond yield, which moves inversely to its price, remained steady at -0.031 percent, the super-long 30-year note yield hovered around 0.568 percent and the short-term 2-year JGB yield stood flat at -0.265 percent by 06:00 GMT.

The Bank of Japan will hold its two-day monetary policy meeting on 20-21 September, announcing its decision on Wednesday, 21 September is a close call. But, we foresee that the BoJ's 9-member policy board is likely to cut rates on excess reserves and expand its monetary base as stagnant growth and continued risk of deflation will weigh on BoJ Governor Kuroda’s decision.

According to recent Reuters poll, 60 percent of economists see the Bank of Japan easing in September 21; 40 percent see them stay unchanged. Pollsters are split on possible policy action and over 50 percent said the BoJ will adopt more flexible wording on inflation targeting.

Moreover, various articles published yesterday pointed to the higher probability that the Japanese central bank will lower its key policy rate by about 10-20 basis points. According to Nikkei daily paper and Reuters, the BoJ will cut its interest rate deeper into negative territory.

Although other news articles, including one from Bloomberg, affirms that there are a variety of different opinions on the board and Governor Haruhiko Kuroda and his delegates reportedly prefer a rate move to expanding quantitative easing, which is thought to be reaching its limit. Therefore, this backs our expectation that the marginal deposit rate will be trimmed next Wednesday.

Moreover, the US CPI data are the last set of key data before the Fed meets next week. We doubt the picture here will change sufficiently to alter the inflation view held by the dovish FOMC members, reported ANZ.

Next week’s FOMC meeting is set to be interesting given the recent divergent Fed speak. The dovish view appears to be in the ascendency for now. We expect no change in policy. The Fed is extending its forecasts out to 2019. We expect there to be a flattening in the Fed’s median ‘dot plot’ with just one hike for this year and two hikes per year (compared to three in the June forecasts) thereafter, they added.

Meanwhile, the benchmark Nikkei 225 closed up 0.70 percent at 16,519.29 and the broader Topix index also closed 0.80 percent higher to 1,311.50 points.