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Outlook for JGB market as tariff shock weakens but does not extinguish rate hike expectations
Long-term and super-long-term JGB yield scenario for May
The 10-year JGB yield is likely to remain at the mercy of US tariff developments in May as the market digests the outcome of the Monetary Policy Meeting on April 30and May 1. We think the BoJ will reiterate its intention to continue raising rates while suggesting (by emphasizing the uncertainty surrounding US tariffs) that an early rate hike is now less likely. Market expectations of a rate increase in the medium term are therefore unlikely to disappear completely. If progress is made in the US-Japan tariff negotiations, the second round of which will reportedly commence on May 1, we project medium- and long-term JGB yields will rise on mounting speculation of further BoJ rate hikes while super-long yields decline as risk aversion subsides. The result would probably be similar if progress were evident in the US talks with China or other countries. On the other hand, we think the opposite would be true if the negotiations were to bog down or hit an impasse. In other words, medium- and long-term JGB yields would fall on fading speculation of further BoJ rate hikes while super-long yields would rise due to increased risk aversion. On the whole, we think speculation of BoJ rate hikes in the medium term will not disappear entirely but is unlikely to reach the levels seen prior to the US announcement of reciprocal tariffs. If expectations of additional fiscal expenditures are rekindled (even if just temporarily) ahead of the Tokyo Assembly elections in June or the Upper House election in July, we could see super-long (and other) JGB yields push higher or at least stop falling.
