To read the full report, please download PDF.
End-FY supply/demand dynamics seen putting floor under 10-year JGB yield
The 10-year JGB yield looks likely to trend sideways this week. We expect to see a reduction in new purchases by domestic market participants as the end of the fiscal year approaches. Meanwhile, investors appear to be continuing their efforts to dispose of low-coupon JGBs by year-end in response to the substantial increase in JGB yields in FY24 as the BoJ made progress on normalizing monetary policy. We therefore expect supply/demand dynamics to put a floor under the 10-year JGB yield even if its US equivalent declines or stock prices fall.
Lingering speculation of an early BoJ rate hike may also serve to discourage dip-buying. At his press conference on March 19, BoJ Governor Kazuo Ueda noted the"increased uncertainty" for the global economy but also said the first round ofresults from the spring wage negotiations, released on March 14, had been "at thehigher end" of what the Bank considers to be "on track." With respect to thereciprocal tariffs and auto tariffs the US is scheduled to reveal in April, the governorsaid that "we may be able to tell sooner than that how policy is likely to play outand how it will affect sentiment, making it possible to develop an outlook of somekind. We intend to ensure that we are not too late." In effect, he indicated that theBoJ will act when it is ready to act, even if uncertainty remains. As such, there arestill some market participants who expect the Bank to raise rates as early as theApril 30-May 31 Monetary Policy Meeting in response to strong wage data,1andthat is likely to keep a floor under short- and medium-term JGB yields.
In BoJ-related developments, we will be watching the Summary of Opinions for the March 18-19 MPM, due out on March 28. Governor Ueda revealed that some Board members at last week’s meeting felt that upside risks to prices "warranted continued attention." "Some members" is thought to refer to Naoki Tamura, amongothers,2and key points to watch will include whether the number of Board members holding similar views has increased given the robust results of the wage talks and how they view the elevated uncertainty stemming from US tariffs. We anticipate that the tone of the Summary will be mostly neutral, much like the governor’s press conference, but it could put upward pressure on the 10-year JGB yield if it contains numerous bullish opinions on the "virtuous cycle" of wages and prices in Japan.
