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Caught between hawkish Fed and dovish BoJ, 10-year JGB yield searches for direction in lead-up to 2025
The 10-year JGB yield searches for direction this week in the lead-up to 2025 while digesting the market impact of a hawkish Fed and a dovish BoJ. It experiences upward pressure if President-elect Donald Trump announces a variety of policy initiatives ahead of his January 20 inauguration, fueling fears of US inflation and sending the 10-year UST yield higher. However, the BoJ's dovish decision last week to forgo a rate hike weighs on JGB yields. At his press conference, Governor Kazuo Ueda explained the decision to stand pat by saying the Bank wanted to confirm a stronger virtuous cycle of wages and prices, noting that 1) a little more information was needed to verify forward momentum in rate hikes and the spring wage negotiations and that 2) there is substantial uncertainty regarding the US and other overseas economies and the economic policies of the next US administration. With respect to the first, large firms' response to union wage demands in the spring negotiations will be revealed next March. But as for the second, no one knows exactly how much data will be available, or when. The 10-year JGB yield therefore continues to hover in its recent range of 1.0% - 1.1%, sandwiched between a hawkish Fed and a dovish BoJ. The OIS market is pricing in about an 80% probability of a rate hike by the March18-19 Monetary Policy Meeting, but there is no guarantee the Bank will have enough information to assess the impact of Trump 2.0 by then. Even if it does, it may still decide not to hike. Meanwhile, continued or accelerated weakness in the yen would create upside risks to prices via import inflation, and the BoJ would eventually be forced to act. This week Governor Ueda will speak to the Meeting of Councillors of Keidanren (Japan Business Federation) on December 25. If he appears to walk back the dovish tone of remarks made at his press conference, the10-year JGB yield reverses higher towards the 1.1% level. On the other hand, if he emphasizes that the Bank has no intention of rushing ahead with a rate hike given the uncertainty hanging over Trump 2.0, the 10-year JGB yield tests the downside and may try to break below the key 1.0% threshold. The market will also be closely watching the extent of dovishness indicated in the Summary of Opinions for the December MPM, set to be released on December 27.
