TOKYO: The Bank of Japan’s insistence on rock-bottom interest rates, even in the face of quickening local inflation, is adding to liquidity stress in the world’s second-biggest sovereign debt market.

Liquidity is also drying up as traders await a BoJ policy decision today, which will follow an expected interest rate hike from the US Federal Reserve yesterday.

The BoJ’s determination to stick to its easing policy is increasingly at odds with other central banks that are raising rates to rein in inflation.

The divergence has driven the yen to a 24-year low, pushing up the price of imported goods in Japan and spurring speculation that the BoJ will have to tweak its policy.

“Market participants are of two minds. They have sympathy with what the BoJ has been saying, but also think there are plenty of reasons to tweak its policy,” said Keisuke Tsuruta, a bond strategist at Mitsubishi UFJ Morgan Stanley Securities Co in Tokyo.

This situation creates uncertainty and contributes to deteriorating liquidity, he said.

Worsening liquidity was further evidenced by the absence of any trades in the 10-year benchmark note yesterday for the first time since June.

That also boosted risk premiums on longer-maturity bonds, with 20-year yields climbing to the highest level since January 2016.

The issue of diminishing liquidity isn’t limited to Japanese bonds.

Bank of America analysts wrote in a research note this month that shrinking trading volumes in the US treasury market may be one of the greatest threats to global financial stability.

 - Bloomberg