Domestic investors have had no choice but to buy Japanese government bonds amid risk aversion, driving interest rates lower. The market sees the adjustment in equity markets, increasingly firm expectations for a BOJ rate hike and calmer external conditions as factors behind the move.
In the domestic market, upward pressure on interest rates has eased, and Japanese government bonds have been showing more stability in the bond market. As equity markets undergo an adjustment, market participants say domestic investors are still seeking to avoid risk by holding government bonds. At times, foreign-affiliated dealers have also shown a reluctance to initiate selling in response to falling share prices and a sharp decline in interest rates.
Meanwhile, changes in external conditions are also said to be affecting the decline in interest rates in Japan. Political uncertainty in Europe and a pause in the rise in crude oil prices have been cited as contributing factors, and market participants have indicated that they expect interest rates to fall again.
There is a view in the market that expectations for a BOJ rate hike are becoming more firmly established, with some pointing out that this is also affecting developments in the domestic bond market. There is also speculation that domestic investors may continue buying government bonds in risk-averse conditions.