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Reciprocal tariff shock forces review of BoJ rate hike scenario
The 10-year JGB yield appears likely to continue testing the downside this week on continued aftershocks from last week’s US tariff announcement. For now, no one knows the ultimate consequences of the de facto dismantling of the free trade system by President Donald Trump’s reciprocal tariff announcement. Yields are therefore likely to be sensitive to daily news headlines. Investors could grow more risk-averse if Canada or the EU were to unveil large retaliatory tariffs against the US, sending the 10-year JGB and UST yields even lower. But if the US indicates it is willing to lower the reciprocal tariffs following bilateral negotiations, the pessimism hanging over the global economy could clear somewhat, giving the benchmark long-term yields in the US and Japan opportunities to reverse higher.
For the time being, we see a diminished probability of a sharp rise in the 10-yearJGB yield. Investors have a certain amount of buying capacity at the start of the fiscal year, and speculation of an early BoJ rate hike has faded. The 24%reciprocal tariff that will be levied on Japan was almost certainly higher than the government or BoJ officials expected. On the morning of April 4, BoJ Governor Kazuo Ueda told the Lower House Financial Affairs Committee that "US tariff policy will weigh on the global economy and the Japanese economy" and that "we will alter our outlook for Japanese economic activity and prices in the event of a major change in the external environment" (comments translated by MUMSS). He noted that while sweeping statements cannot be made about the impact of the reciprocal tariffs on prices,1the BoJ will have to be careful when considering the next rate hike to ensure that its actions do not derail the "virtuous cycle of wages and prices." At the very least, we think "the Bank will not raise its policy interest rate when financial and capital markets are unstable," as noted by Deputy Governor Shinichi Uchida in a speech on August 7, 2024.
The 10-year JGB yield fell to 1.160% at one point in after-hours trading on April 4.Our Apr-Jun 2025 forecast range (closing basis) for the 10-year yield is 1.200% to1.600%, and our projection for the end of June is 1.450%. We had been anticipating a decline in the 10-year JGB yield in the Apr-Jun quarter based on the expectation that end-of-FY position adjustments would come to an end and that speculation of an early BoJ rate hike at the April 30-May 1 Monetary Policy Meeting would fade following the announcement of reciprocal tariffs. But given the larger-than-expected shock caused by the tariff announcement, we will need to decide whether to revise our forecast ranges
