Japan Economic & Financial Weekly

JGB market outlook for October 13-16

We expect the 10-year JGB yield to continue trading at the elevated level of around3% in the week of October 13. The Bank of Japan’s Opinion Survey on the General Public’s Views and Behavior, due to be released on October 13 (Tue), may show that households’ five-year inflation expectations continue to trend higher. If that fuels concerns that the BoJ is falling behind the curve, the 10-year JGB yield could trade with an upward bias. The government is due to submit its consumption tax cut bill on October 9 (Fri). If Diet deliberations fail to identify specific alternative funding sources, fiscal policy concerns could put gradual upward pressure on the10-year yield. A rise in the 10-year UST yield following the release of the September CPI on October 14 (Wed) or the September PPI on October 15 (Thu)would also help to push the 10-year JGB yield higher. Conversely, the 10-yearJapanese yield could struggle to rise any further if Prime Minister Sanae Takaichi and Finance Minister Satsuki Katayama continue to emphasize fiscal discipline or signal a shift away from reflationary policy, as they have done last week, in response to market developments. A further increase in French government bond yields due to fiscal and political concerns could also boost demand for safe-haven assets and lower the 10-year UST yield, which would help to limit any rise in the Japanese equivalent. Overall, we expect the 2-year-forward 1-month TONA OIS rate, a widely followed proxy for expectations of the terminal rate, to remain elevated but not rise materially above 2.5%, the upper end of the BoJ’s estimated range for the neutral rate of interest (Graph 1). As a result, we expect the 10-yearJGB yield to remain at the elevated level of around 3%.

Forecast range (intraday basis):

10-year JGB yield: 2.965%–3.115%

30-year JGB yield: 3.980%–4.180%