(Bloomberg) -- More signs of sustained improvement are appearing in Japan’s bond market, even though it remains dysfunctional after over a decade of radical monetary easing reduced the incentive for investors to trade actively, according to a Bank of Japan survey.
The poll of market participants showed that 26% of respondents said functioning of the nation’s debt market was low, compared with 3% who said it was high. As a result, the diffusion index was at minus 23, the best showing in more than two years and compared with minus 24 in the previous survey taken in May.
The poll took place at a precarious time for bonds, from Aug. 1 to Aug. 7 when unwinding of yen-funded carry trades roiled global markets and after the BOJ unveiled a plan on how it will cut debt purchases in the next two years. It was also right after the monetary authority raised interest rates on July 31, catching by surprise many traders who were expecting no increase.
The rise in the index was probably driven by hopes that slower BOJ bond buying will lead to further improvement in functioning, said Akio Kato, senior manager of the strategic research and investment division at Mitsubishi UFJ Asset Management Co. “The BOJ’s plan on debt buying reduction increased the transparency of market operations.”
The quarterly survey looks at topics such as bid-ask spreads, and the frequency and quantity of deals.
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