Bond market functioning shows less concern in Bank of Japan survey

Japanese government bond dealers are growing less concerned about the overall functioning of the bond market and liquidity, a Bank of Japan survey showed on Wednesday, suggesting easing strain from quantitative easing.

The BOJ surveyed 39 financial institutions that were eligible to participate in JGB market operations in May in order to better understand how its massive purchases of government debt via its quantitative easing are impacting the market.

The diffusion index for the overall functioning of the market improved to minus 5 in May from minus 25 in the previous survey in February.

The index subtracts the percentage of firms who said functioning is low from the percentage who said the market is functioning very well.

The diffusion index for bid-ask spreads improved to plus 5 in May from minus 12 in the previous survey, showing fewer companies are worried about liquidity and widening spreads between purchase and sale prices.

The survey showed the diffusion index for customer orders was minus 30, up from minus 45 previously as some firms saw an improvement in trading flows.

The BOJ said last year in November it would conduct a new survey of bond investors to improve market communication after it expanded its quantitative easing in the previous month.

The BOJ's debt purchases under its quantitative easing are so large that it is buying the equivalent of around twice as much debt newly issued by the government.

Some economists have said in the past this could damage the bond market and crowd out institutional investors who need to hold bonds for collateral or to offset liabilities.