Japan Economic & Financial Weekly

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JGB curve distortion: Causes of reduced curvature

The 10-year JGB yield hovers nervously in the 0.80% - 0.90% range this week.The Nikkei Average dropped 1,260 points on Friday morning in response toheightened tensions in the Middle East, and if it continues to fall the 10-year yieldwill test the downside with an eye on the key psychological threshold of 0.80%. Adecline to the April 10 high of 0.795% would close the gap on the chart. If stockprices stop their slide and reverse higher in a technical correction, the bond markettakes a wait-and-see stance until the results of next week’s Policy Board meetingare released on April 26. Until then, the 10-year JGB yield trades with an upward ordownward bias depending on developments in the 10-year UST yield andUSD/JPY. It takes on an upward bias after the BoJ policy statement and OutlookReport are released. Although the Bank decides to leave policy on hold, it raises itsFY24 inflation projections in the Outlook Report and makes an initial forecast of 2%inflation in FY26. This outcome is in line with pre-meeting news reports and contains no surprises, but speculation of additional rate hikes gradually builds. If the BoJ judges that the risks to its price outlook are now skewed to the upside, concerns about early additional rate hikes pick up and the 10-year JGB yield tests the upside. The 30-year JGB yield trades at a level that keeps the 10s30s JGB spread at around 105bp