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10-year JGB yield seen falling on start-of-year buying beforestabilizing ahead of MPM
We expect the 10-year JGB yield to move lower in the first part of April beforestabilizing ahead of the month-end Monetary Policy Meeting. Elevated yields in the1.5% - 2.0% range are likely to attract a certain amount of demand at the start ofthe new fiscal year. Buyers may also be encouraged by concerns that Trumpadministration tariffs -- both reciprocal tariffs and those levied on specific productcategories -- will trigger a US and global economic downturn. Finally, institutional investors that were unable to buy ahead of the fiscal year-end may start off the new year with buying aimed at securing carry income.
That said, we think few players will try to chase bond prices higher. Structural laborshortages continue to drive wage hikes in Japan, and there has also been anupswing in longer-term inflation expectations formed adaptively in response tohigher observed inflation. A fundamental resolution to Japan’s labor shortage isunlikely even if US tariffs lead to a slump in exports. In addition, the Summary ofOpinions for the BoJ’s March MPM was notable for the hawkish views it contained,among which was the following: "Japan’s economy is at a stage where the pricestability target is close to being achieved.... In fiscal 2025, the Bank will enter anew phase where it needs to take this into account when communicating to thepublic." We therefore expect any decline in the 10-year JGB yield to come to aquick end due to lingering speculation of an early rate hike at the April 30-May 1MPM (risk scenario) and worries about a potential increase in the terminal rate. Wealso think concerns about an expansion of fiscal expenditures could send the 10-year yield higher if the ruling coalition begins discussing another economicpackage in preparation for the upcoming elections (Tokyo Metropolitan Assembly inJune and Upper House in July) once the FY25 budget is passed.
