Japan Economic & Financial Weekly

JGB market outlook for September 24 –October 2

Over the two weeks through October 2, we expect the yield on the on-the-run 10-year JGB to price in the market’s assessment of this week’s FOMC and BoJ decisions. On September 16, the FOMC unanimously decided to raise the target range for federal funds by 25bp to 3.75% - 4.00%, marking its first hike in around three years. On September 18, the BoJ also raised rates by 25bp in a 7-2 majority vote. This followed a hike in June, with the three-month interval being the shortest in the current tightening cycle. For now, we think markets will try to test the strength of the BoJ’s commitment to rate hikes relative to the Fed. The latter’s hawkish shift is likely to be conducive to a rise in the dollar vs. the yen from the perspective of the interest rate differential. If the market sees the BoJ as taking a tentative approach to hiking in this environment, the yen is likely to weaken. Renewed concerns that the BoJ had fallen behind the curve would likely lift the 10-year JGB yield, with the yield curve undergoing a bear steepening. Conversely, if markets judge the BoJ to be as committed to raising rates as the Fed, the yen is unlikely to fall further. The increase in the 10-year JGB yield would then be relatively contained, and the curve would probably undergo a bear (twist) flattening.

Which scenario materializes will depend on the tone of Governor Kazuo Ueda’s post-meeting press conference (this report was written before the briefing). On balance, we would be more alert to the first scenario, involving an increase in the10-year JGB yield and a bear steepening of the yield curve. Whereas the Fed’s decision was unanimous, BoJ Board members Toichiro Asada and Ayano Sato, both appointed by the Takaichi administration, opposed the rate hike. Markets could therefore conclude the BoJ is taking a tentative approach to rate hikes. The retention of Minoru Kiuchi -- who is a leading advocate of “responsible and proactive fiscal policy” and frequently attends BoJ meetings -- as minister for economic and fiscal policy and growth strategy in the September 17 cabinet reshuffle could also be viewed as making it more difficult for the Bank to adopt a proactive stance on tightening. If the second scenario materializes, increases in the10-year yield would probably be contained to some extent. However, a substantial decline is unlikely as long as the rate-hiking cycle continues, as we argued in the September 1 Fixed Income Commentary(“Quick comment: 10-year JGB yield hits3%”).

September forecast range (intraday basis):

10-year JGB yield: 2.920%–3.080%

30-year JGB yield:4.000%–4.190%