To read the full report, please download PDF.
Rise in 10-year JGB yield on hawkish BoJ speculation may be approaching expiration date
The 10-year JGB yield looks likely to remain in elevated territory this week. The market is pricing in a significant possibility of a 1.0% policy rate by 2H FY25, and we view current yields as compelling. That said, dip buyers are still only testing the waters due to lingering concerns about a pick-up in the pace of BoJ rate hikes, and there is as yet no sense that the rise in JGB yields has paused. Nevertheless, the advance is likely to begin losing momentum later this week. Given the support from high yields, we anticipate a certain amount of demand at both the 20-year JGB offering on February 18 and the liquidity enhancement auction on the 20th, which will target bonds maturing in 5-15.5 years. Policy Board member Hajime Takata will attend a meeting of business leaders in Miyagi prefecture on February 19. Mr. Takata typically emphasizes such factors as market liquidity and functioning and tends to be viewed as a hawk. Still, we do not think he would indicate as clear a path for the policy rate as fellow Board member Naoki Tamura did on February 6. Mr. Takata said in a speech on September 5 last year that "I also think that due attention should be paid to economic and market developments abroad, as shocks originating overseas have been a constraint on Japan's economic recovery on a number of occasions in the past." Policy initiatives under the second Trump administration are just getting started, and a great deal of uncertainty surrounds the outlook for US tariff policy in particular. If Mr. Takata makes frequent mention of this uncertainty, it could reassure buyers by discouraging speculation of an acceleration of BoJ rate hikes. But if he argues that the neutral rate of interest is higher than 1%, the 10-year JGB yield may push higher and break above 1.4% (although this remains a risk scenario).
