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How $9 Trillion Bond Market Adds Up to Zero for Japanese Traders

25 Mar 2018 1:00 pm
By Suryatapa Bhattacharya and Kosaku Narioka 

TOKYO -- It is the world's second-largest government bond market after the U.S., with some $9 trillion in outstanding debt.

Yet in Japan, the daily volume of government-bond trading is often measured these days not in trillions or billions, but in millions of dollars -- and sometimes just with a single digit, zero. The central bank is swallowing up so much of the new bond issuance that traders say there is just not much to do.

"It's becoming like a deserted village. All that's left is for us to fade away and die," said Jun Fukashiro, who oversees bond investments for Sumitomo Mitsui Asset Management Co. The 53-year-old asset manager, who has been involved in government bond investing or trading since 1990, says that when he goes out with people in the business, he just sees the old faces, "the ones who are headed for retirement pretty soon."

Activity has especially shrunk since September 2016, when the Bank of Japan, the nation's central bank, said it would seek to keep the yield on the benchmark 10-year government bond around zero. The move is part of the bank's push to bring about steady inflation of 2%, as it tries to boost the country's economy.

On March 13, the newest 10-year bond didn't trade at all on the main system for the trading, operated by Japan Bond Trading Co. That has happened only seven times in the 24 years of data available from Japanese market-data provider Quick Corp., and six of those were in the last four years.

This past week, the near-comatose state continued, with daily trading volume in the benchmark 10-year bond at Yen18 billion ($172 million) or less each day, according to Quick. Trading volume this year is down 22% compared with year-earlier levels.

Direct comparison to the U.S. is difficult, but average daily trading volume in U.S. Treasury bonds with maturities between six and 11 years was $112 billion in 2017, according to the Securities Industry and Financial Markets Association.

The Bank of Japan already owns 41% of the Japanese government bond market and is buying hundreds of billions of dollars more each year to pump cash into the financial system and ensure that plenty of low-interest funds are available for borrowers. The 10-year bonds aren't attractive to private investors because the yield -- 0.02% as of Friday -- falls below the core inflation rate of around 1%, eroding the value of the bonds over time.

Tadashi Matsukawa, who heads the bond-trading unit at the Tokyo office of New York-based asset manager PineBridge Investments, said he used to trade Japanese government bonds every day before the Bank of Japan pinned the yield near zero. Now it is every other day, he said.

Mr. Matsukawa said he misses the excitement of a more active market. "There is limited space for us to move around, less opportunity for us to make money."

Views are divided on whether it matters that so little trading happens in the instrument, the 10-year bond, seen as the interest-rate benchmark for the world's third-largest economy.

Japan's economy is growing steadily, and the stock market, despite some jolts this year when sharp U.S. stock falls spread across the Pacific, has generally prospered under the central bank's extreme monetary easing.

Bank of Japan Gov. Haruhiko Kuroda, asked in Parliament recently about the downsides of his policies, said he believed the pluses outweigh the minuses for now and pointed to positive economic indicators such as a tight job market, rising wages and a rising inflation rate that has made it halfway to his 2% target. He has pointed to trading data that suggest people who want to buy and sell government bonds aren't having any trouble doing so.

Still, some market watchers are worried the central bank's iron grip means that any concerns about government finances no longer get reflected in bond-market trading. In the U.S., government bond yields rose this year after Congress passed tax cuts that analysts said were likely to raise the U.S. budget deficit. In Japan -- for now, at least -- the benchmark yield is staying around zero regardless of market views about deficits.

The only trade that sees more activity is when brokerages that have purchased bonds at Ministry of Finance auctions resell the bonds to the Bank of Japan, which isn't allowed to buy them directly from the government.

Between December and February, the Ministry of Finance issued bonds worth Yen7.4 trillion maturing on Dec. 20, 2027. As of March 9, the Bank of Japan already owned 71% of those bonds.

"There is only one trade in town now that makes money," says Naka Matsuzawa, rates specialist with Nomura Securities.

Mr. Fukashiro, the asset manager at Sumitomo Mitsui Asset Management, said he was worried about what would happen if the specialized skills of government bond investors and traders fade away as they move to more vibrant markets or retire. At some point, he said, pressure for bond yields to rise may build up, and there won't be many people left who know how to handle such volatility.

"A big change will probably take place once everyone's gone," he said. "That's always the case in markets."

Write to Suryatapa Bhattacharya at Suryatapa.Bhattacharya@wsj.com and Kosaku Narioka at kosaku.narioka@wsj.com

(END) Dow Jones Newswires

March 25, 2018 09:00 ET (13:00 GMT)

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