JGBs, already bolstered by BOJ, get extra kick from Fed
* Benchmark 10-year yield skids to 4-month low
* BOJ's JGB holdings top that of private banks combined: BOJ data
* Yield curve flattens; upcoming redemptions also support
TOKYO, Sept 19 (Reuters) - As the U.S. Federal Reserve's surprise decision to maintain its stimulus pushed Japanese government bond yields to multi-month lows, data on Thursday showed the Bank of Japan now holds more JGBs than all of the nation's private banks combined, thanks to its own quantitative easing.
With no end to the BOJ's massive bond-buying scheme in sight, and with the U.S. central bank leaving its stimulus spigot open for the time being, any investors who had hoped to buy JGBs on dips were disappointed.
"People had been expecting a bit of a jump in (JGB) yields in September, so that would have been the opportunity to buy bonds with an eye on the next fiscal half-term starting in October, but that didn't happen," said Maki Shimizu, senior JGB strategist at Citigroup in Tokyo.
Instead, the benchmark 10-year JGB yield fell 4 basis points to 0.665 percent, its lowest since May 10, while the 20-year JGB yield skidded 6 basis points to 1.590 percent, its lowest since June 3. These moves followed the Fed's unexpected decision to refrain from tapering its $85 billion per month in asset purchases.
"Monetary policy is the main driver for both U.S. and Japanese yields, especially when the U.S. bias is on the tightening side rather than easing," Shimizu said.
Data released by the BOJ on Thursday highlighted the scope of its easing scheme. The central bank's holdings of Japanese government bonds rose to a record 150 trillion yen ($1.53 trillion), exceeding the total amount of government debt held by private banks.
The BOJ's JGB holdings soared 55.5 trillion yen, or 59 percent, over the past year, with much of the gain coming after the bank's April 4 pledge to double its long-term bond holdings in order to meet its inflation target of 2 percent in two years.
BOJ board member Takahide Kiuchi said on Thursday that the Fed's decision underscores the challenges in ending unconventional monetary policy.
"The BOJ has no choice but to continue purchasing JGBs. Banks are trying to reconstruct their JGB portfolios, but JGBs have gone up so much that they need to just chase the market," said Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments.
"I think we will see more and more of the BOJ absorbing JGBs rather than banks buying JGBs," he added.
Upcoming redemptions also supported bonds, market participants said, with more than 13.5 trillion yen of JGBs set to mature on Friday and investors looking for places to put those funds.
The yield curve flattened, with the 10-year yield's spread to 5-year yields shrinking to 42.5 basis points from 50 basis points earlier this month. The 20-year yield spread to 5-year debt shrank to a three-month low of 1.350 points from 1.430 earlier in September.