Japan Economic & Financial Weekly

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10-year JGB yield seen testing the upside now that Fed and BoJ events are behind us

The yield on the currently issued 10-year JGB continues to test the upside this week. BoJ Governor Kazuo Ueda confirmed on August 23 in his out-of-session testimony before the Diet that the Bank would "adjust the degree of monetary accommodation" if developments in economic activity and prices moved in line with the BoJ's outlook. Although one lawmaker questioning the governor said the Bank had been too late in trying to normalize policy, few criticized it for triggering the plunge in share prices with the July rate hike. Mr. Ueda reaffirmed the BoJ's intention to continue raising rates once it was convinced that economic activity and price developments were moving in line with its outlook. This could gradually restore diminished expectations of future rate hikes and prompt the 10-year JGB yield to reverse higher, although the advance is likely to hit resistance in the 0.90%range. (The market has already priced in a September start to US rate cuts, but there is lingering speculation ahead of the August payrolls report (Sep 6) that weak employment data will prompt the Fed to cut rates sharply.) In addition, the free-for-all expected in the LDP leadership election on September 27 -- for which campaigning is set to begin on September 12 -- is likely to put market participants in wait-and-see mode and thus keep JGB yields from moving significantly higher.