Japanese bonds rise for second day as crude decline eases inflation concerns

By Rocky Swift

TOKYO, March 25 (Reuters) - Benchmark Japanese bonds climbed on Wednesday for a second consecutive session as signs of a potential settlement to the Middle East crisis pushed oil prices lower and helped ease inflationary concerns.

The 10-year Japanese government bond (JGB) yield JP10YTN=JBTC fell 1.5 basis points (bps) to 2.250%. Yields move inversely to bond prices.

U.S. President Donald Trump said that Washington was making progress in its efforts to negotiate an end to the nearly month-long war with Iran.

Like many global markets, the JGB sector has swung between gains and losses on mixed signals on whether the crisis will escalate further or move toward de-escalation.

Japan's economy remains highly exposed to spikes in crude oil prices due to its heavy reliance on imported energy.

Inflationary risks erode the real value of fixed bond payments and increase pressure on the central bank to tighten monetary policy in order to contain price growth.

Minutes released on Wednesday from the January meeting of the Bank of Japan showed that policymakers see a continued need to raise interest rates, though they have not committed to a specific pace for future hikes.

The hurdle for accelerated hikes may be high, considering data that showed easing inflation prior to the war and now the potential for economic slowdown, according to Miki Den, a senior Japan rate strategist at SMBC Nikko Securities.

"Even if the current rise in crude oil prices contributes to a fundamental increase in inflation, the market appears to view the likelihood of rapid rate hikes as low," Den said in a note.

The 30-year JGB yield JP30YTN=JBTC sank 2.5 bps to 3.520%. The yield on the 40-year JGB JP40YTN=JBTC, Japan's longest tenor, fell 0.5 bps to 3.755%.

The two-year yield JP2YTN=JBTC, the one most sensitive to the BOJ's policy rates, increased 0.5 bps to 1.3%. The five-year yield JP5YTN=JBTC was flat at 1.705%.