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10-year JGB yield tries to find its level after speculation of early BoJ rate hike fades
The 10-year JGB yield looks likely to hover around the 1.30% level this week. The medium- and long-term sectors have gradually stabilized after the "tariff shock" sparked a period of extreme market volatility the week before last, although volatility in the super-long sector remains high. The widening of asset swap spreads also appears to have paused. Uncertainty over the economic outlook has caused speculation of an early BoJ rate hike to fade, and we anticipate a certain amount of dip-buying demand in the 1.35% to 1.40% range. In the other direction, it is difficult to envision the 10-year yield breaking swiftly below 1.2%. Even if concerns about Trump administration policies were to send global stock prices sharply lower, we see limited further downside for the 10-year yield unless the market starts pricing in BoJ rate cuts (i.e., a lowering of the rate paid on current account balances). If anything, a stock market plunge might rekindle speculation that the Ishiba cabinet will submit a supplementary budget to the current session of the Diet (which it recently decided not to do), fueling concerns about fiscal risk and putting bear steepening pressure on the long end of the curve. This week we need to keep an eye on developments in the US-Japan exchange rate talks. The IMF and World Bank will hold their Spring Meetings in Washington D.C. on April 21-26, and G20 finance ministers and central bank heads will meet on April 23-24. Following a cabinet meeting on the morning of April 18, Finance Minister Katsunobu Kato told a press conference that he hoped to attend the IMF and World Bank events along with the G20 conferences and that Japan was still trying to arrange bilateral meetings with the US and other nations in Washington. If he were to meet with US Treasury Secretary Scott Bessent on this visit, it might spur speculation that the BoJ was planning an early rate hike to satisfy US demands for a stronger yen and a weaker dollar. While we think the Bank is unlikely to raise rates to strengthen the yen when there are significant downside risks to the economy, the possibility might be used as an excuse to sell JGBs into strength.
This week is also likely to bring a variety of speculation about the April 30-May 1Monetary Policy Meeting and Outlook Report. Governor Kazuo Ueda said in an interview with Sankei Shimbun on April 16 that since February, the risks surrounding Trump administration trade policy have "moved closer to the bad scenario "envisioned by the BoJ. In the next Outlook Report, the Bank may note a growing risk that the US tariffs will have a negative impact on the Japanese economy. With respect to monetary policy conduct, we think the BoJ will maintain its existing stance: "If the outlook for economic activity and prices presented in the Outlook for Economic Activity and Prices (Outlook Report) is realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation." However, it is likely to emphasize that uncertainty is extremely high and that it intends first to assess the situation with a great sense of urgency.(Comments from Sankei Shimbun interview translated by MUMSS, same below.)
