Bank of Japan research shows failing bond market liquidity

The Bank of Japan may have inadvertently cornered the bond market, according to its own researchers. BOJ Governor Kuroda endorsed QE once again on Friday, saying it was working well but inside the bank, questions are mounting with the BOJ holding $8.4 trillion in sovereign debt.

Market participants are also casting worries as two-year notes have been untraded at Japan Bond Trading Co, the nation's largest inter-dealer debt broker, since March 18, according to Bloomberg. The indicated yield is 0.011% but implied volatility has jumped 26% since the start of the year.

Japanese 2-year note yields

"There is no major disruption in executing trades or hedging positions for now, and it doesn't seem liquidity in the market has declined drastically," BOJ researchers wrote in the report. "Having said that, a number of indicators signal that market liquidity has been declining since autumn 2014."

The report states that the content doesn't reflect the central bank's official view.

Bloomberg also reports that investors met with the Ministry of Finance last week to voice concerns about volatility and lower liquidity. A BOJ survey from late February showed 95% of market participants saying JBG market functionality was either low or not very high.