Japan Economic & Financial Weekly

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We see JGB yields testing upside even if BoJ opts not to hike at July meeting

The 10-year JGB yield tests the upside in August. The BoJ decides on and announces a detailed plan for reducing its bond purchases at the July 30-31Monetary Policy Meeting. The news is shrugged off since the size of the cuts is largely in line with the market consensus. The Bank opts not to raise rates (our forecast), but at his press conference Governor Kazuo Ueda emphasizes the possibility of a hike in the near future, noting that "the likelihood of achieving the2% price target in a sustainable and stable manner continues to gradually increase." The Summary of Opinions for the July meeting, released on August 8,reveals that Policy Board members discussed the conditions for and timing of a rate hike and that a majority of members are in favor of raising rates in the near future. Mounting concerns about a rate hike at the next Board meeting (September19-20) put upward pressure on the 10-year JGB yield. In the US, the 10-year UST yield comes under downward pressure from growing expectations of a September start to Fed rate cuts and concerns about a slowdown in the US economy, and that weighs on the 10-year Japanese bond yield. The latter also comes under downward pressure if position adjustments by forex players send the yen higher against the dollar. The JGB curve bear flattens as the market prices in a BoJ rate hike.