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Friday, September 20, 2002


Perhaps the best introduction to this latest faux pas in the unwinding Japan saga is the comment from Merrill Lynch bond strategist Masuhihsa Kobayashi who is quoted as saying: "It seems that fiction is becoming a reality." The backdrop to this rather painfully reality recognition (actually life has always been stranger than fiction) is todays withdrawal the Y1,800bn on auction offer since the bid volume was only Y1,185bn. This latest embarassment - following the BOJ sally into the terrain of share buying earlier this week - only serves to underline the instability of the whole situation. This is the first time ever a bond offer has been withdrawn (of course the bonds themselves have been fully subscribed by the contracted underwriters) and gives the awful impression that there are few buyers for Japan government debt. Of course the reality might just be an internal factional shooting war, hitting back at the BOJ, and attempting to undermine its authority, in the wake at the share buying initiative, which could, in its turn have been only a way of turning up the pressure. Who outside of the Byzantine world of Japanese institutional finance knows? The only painfully obvious truth is that this cannot continue indefinately.

Investor confidence in Japan suffered another blow on Friday after a Y1,800bn auction of 10-year Japanese government bonds was undersubscribed for the first time in its history. Traders were unnerved by the unprecedented lack of demand, but chalked it up to a case of incredibly bad timing. Earlier this week, the Bank of Japan said it would buy shares directly from commercial banks in an effort to reduce their massive exposure to stock markets, a move which sent shock waves through the markets.

Masaru Hayami, governor of the BoJ, was unconcerned. "I am not that worried. I believe investors' appetite for JGBs is unchanged," said Mr Hayami. He added that 10-year JGBs were in a correction phase and that some market instability was inevitable.But investors thought otherwise, and the auction's failure sent the JGB market reeling. The yield on the benchmark 10-year JGB rose 12.5 basis points to near two-month highs and the key 10-year JGB futures contract fell more than a point to 139.04 in intraday trade.
Source: Financial Times

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