Japan Economic & Financial Weekly

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Will diminished expectations of further BoJ rate hikes recover?

The yield on the currently issued 10-year JGB reverses course and tests the upside this week. The 10-year UST yield moves higher on fading worries about a hard landing for the US economy, a rally in US and Japanese stock prices, and a reversal higher for USD/JPY, and the 10-year Japanese yield rises in sympathy. BoJ Governor Kazuo Ueda is scheduled to testify before the Diet when it meets out of session on August 23, and market expectations of additional rate hikes pick up if he reiterates that "if the outlook for economic activity and prices…will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation." However, the 10-year yield’s advance slows once it enters the 0.90% range because 1) there is still some short-covering demand following the recent plunge in bond yields and 2) market participants cannot predict the timing of the next rate hike given the uncertain outcome of the LDP’s September leadership election. Additionally, if Fed Chair Jerome Powell mentions downside risks to the US economy in his speech at the Jackson Hole economic policy symposium (Aug 22-24), the 10-year UST yield declines on expectations of aggressive rate cuts, with a corresponding impact on JGB yields.