Japan Economic & Financial Weekly

To read the full report, please download PDF.

JGBs look to find their footing after mid-summer turmoil

The yield on the currently issued 10-year JGB resists further declines and begins to test the upside this week. A number of factors—including the hawkish turn by a BoJ that was thought to be reluctant to raise rates, the dovish shift by a Fed that was seen as being reluctant to cut rates, and fresh concerns about a slowdown ina US economy that was believed to be solid—combined to accelerate the unwinding of existing positions that is sometimes seen during the summer season. BoJ Deputy Governor Shinichi Uchida’s statement on August 7 that "the Bank will not raise its policy interest rate when financial and capital markets are unstable" also threw cold water on expectations of future rate hikes. That said, yen-buying pressure has exhausted itself now that speculators appear to have finished unwinding their short-yen positions. Fears of a hard landing for the US economy fade if next week’s US inflation data (Aug 13-14) and retail sales report (Aug 15)are in line with the market consensus. And if Japanese GDP data for Apr-Jun 2024(Aug 15) confirm that personal consumption has begun to rise on a QoQ basis, investors begin to worry that growth and inflation are developing in line with the BoJ’s outlook, which raises the possibility of another rate hike once markets stabilize. Position adjustments continue in response to the recent plunge in yields, but the10-year JGB yield gradually works its way back to where it was trading when the BoJ raised rates on July 31.