Japan Economic & Financial Weekly

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Where will JGB yields settle after BoJ rate hike?

The 10-year JGB yield remains in elevated territory around the 1.2% level thisweek. After digesting Governor Ueda’s press conference on January 24, the 10-year yield follows overseas rates’ response to the FOMC meeting on January 29and the ECB Governing Council meeting on January 30. If market participants takea hawkish view of Mr. Ueda’s comments (A), upward pressure on bond yieldsprompts the 10-year yield to test the YTD high of 1.255% posted on January 15.But if his comments are seen as having a dovish tone (B), investors buy back thebonds they sold on worries the Bank would adopt a more hawkish stance. That,coupled with a growing sense that all the bad news is out, weighs on the 10-yearJGB yield. In either case, there is limited upside or downside for the 10-year yieldbarring a major change in the scenario being priced in by the market (namely, thatthe BoJ will continue raising rates every six months or so until it reaches theterminal rate of 1%). In the case of (A), the market is likely to continue focusing on the uncertain outlook for domestic politics and US economic policy ahead of elections for the Tokyo legislature in June and the House of Councillors in July, making it difficult for the market to immediately price in another rate hike. In the event of (B), further weakness in the yen may cause concerns about an early rate hike to persist. We project the 30-year JGB will continue to trade firmly and expect the two BoJ buying operations scheduled this week will provide support for supply/demand.