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10-year JGB yield caught between rising uncertainty and BoJ rate hike speculation
The 10-year JGB yield is likely to pause its ascent this week and flatten off. Fears that Trump administration tariff policy will trigger a US recession continue to weigh on the 10-year UST and JGB yields, or at least help to curb any advance. Last week we wrote that "Trump 2.0 is accelerating the reversal of the 'peace dividend' brought about by the end of the Cold War" and that "we intend to keep a close eye on wage data (which have recently been robust) and consider the potential impact of these big changes in the external environment on the Japanese economic outlook." In the event, global financial and capital markets were forced to rethink the consensus that tariffs were merely a negotiating tool for US President Donald Trump and that the administration would avoid policies that hurt the stock market(the so-called Trump put). The US imposed the promised tariffs on steel and aluminum on March 12, and on April 1 it is scheduled to complete a study of its trading partners in preparation for the introduction of reciprocal tariffs. There is a growing likelihood that the US could impose reciprocal tariffs and import duties on individual products, such as motor vehicles, as early as April 2, in which case we would have to closely examine the impact on both the US and Japanese economies.
Meanwhile, the annual wage negotiations in Japan have gotten off to a good start in 2025, driving concerns about a BoJ rate hike that are expected to put a floor under the 10-year JGB yield. If bond yields start to fall, we think relieved selling by domestic investors ahead of the fiscal year-end would help to halt the decline. The Rengo confederation of labor unions is scheduled to announce the second round of results from this year’s wage talks on March 21. Speculation of a BoJ rate hike is likely to persist if sizeable increases in base pay continue and are also in evidence at small businesses. Some market participants believe the Bank will opt for an early rate hike in view of the risk of a US recession. We expect the BoJ will leave the policy rate on hold when it meets on March 18-19, but the market could begin pricing in a higher probability of a rate hike at the April 31-May 1 MPM, thus putting upward pressure on the 10-year yield, if Governor Kazuo Ueda says at his press conference that the prospects for achieving the Bank’s outlook have improved even further or that the upside risks to prices have increased somewhat. If, on the other hand, he notes that the wage talks have produced solid results but more time is needed to determine whether higher wages are feeding through to prices (and whether consumers are willing to pay those prices), or if he says that the Bank will continue to carefully assess the impact of the Trump administration’s tariff policy on its baseline scenario in view of the latest information, we anticipate only a modest impact on the consensus forecast, which is that the next rate hike will come in July. We think the latter outcome is more likely and expect Governor Ueda to note the rising uncertainty in the external environment even as he concludes that the results of the spring wage negotiations are "on track."
