Japan Economic & Financial Weekly

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US-Japan summit held amid mounting BoJ rate hike speculation

The 10-year JGB yield pauses its advance this week but remains in elevated territory. There are no scheduled opportunities for BoJ Policy Board members to speak. Barring unscheduled Diet testimony by Bank officials, the market spends the week reacting to developments in the external environment, and particularly in US bond yields. If the January US payroll report (Feb 7), CPI print (Feb 12), and PPI report (Feb 13) offer indications that inflation is slowing, US Treasury yields decline, putting downward pressure on the 10-year JGB yield. But any down side for the latter is limited given persistent concerns about an acceleration of BoJ rate hikes and the possibility of a higher terminal rate. Meanwhile, if US economic data indicate that the recent cooling of inflation has paused or reversed, higher UST yields lift Japan’s benchmark long-term yield. However, any rise above 1.3% elicits dip-buying demand that soon halts the advance. The 30-year JGB continues to trade relatively firmly due to sustained expectations that rate hikes will have only a modest impact on the super-long sector relative to shorter-dated bonds. One possible upsetting factor is the US-Japan summit scheduled to take place in the US on February 7 (local time). JGB market participants are likely to focus on comments regarding US tariff policy and exchange rates. While some expect little concrete discussion of such issues at this meeting, it could still affect the JGB market on Monday. If the atmosphere at the meeting is friendly from start to finish, it could spark speculation that the US will not raise tariffs on Japanese goods, atl east for the time being. It could also encourage a view that the US will not insist ona correction in the cheap yen. In the former case, diminished fears of an economic downturn would tend to push JGB yields higher, while in the latter event diminished speculation of BoJ rate hikes would probably tend to weigh on JGB yields. It is difficult to predict which impact will be greater; investors should keep in mind that reactions to the summit may move the starting point for the 10-year JGB yield on Monday.