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JGB yield and yield curve scenarios for December and 2HFY25-FY28ields higher?
Long-term and super-long-term JGB yield scenario for December
We expect the 10-year JGB yield to test the upside in the 1.8% range in December. It will continue to be influenced by developments in the Takaichi administration’s “responsible fiscal stimulus” and market speculation regarding the timing of a Bank of Japan rate hike.
The BoJ has begun preparations for a rate increase. Policy Board members Junko Koeda and Kazuyuki Masu have suggested the conditions for a rate hike are gradually falling into place, and the market is now pricing in a nearly 60%chance of a December tightening. Governor Kazuo Ueda will give a speech and hold a press conference in Nagoya on December 1. If he says that the initial momentum of the spring wage negotiations is “solid for now” or notes that the Bankis “closely monitoring the risk of a pick-up in inflation due to the falling yen,” theJ GB curve is likely to undergo a further bear flattening. Conversely, if the governor adopts a neutral (or indecisive) stance by saying the BoJ will decide whether to raise rates based on information and data available at the time of the December meeting, the short- and medium-term sectors will probably see some buybacks. But with expectations for a January rate hike unlikely to diminish even if the Bank stands pat in December, any buybacks are likely to be modest.
Market participants are also monitoring the outlook for the Takaichi administration's "responsible fiscal stimulus” as well as the “high-pressure economy” thesis advocated by certain private-sector experts at the Council on Economic and Fiscal Policy. The FY25 supplementary budget proposal, which the cabinet is scheduled to approve on November 28, contains general account spending totaling JPY18.3trillion, with JPY11.7 trillion to be financed with additional JGB issuance (Bloomberg News). The Nikkei reported on November 21 that Ms. Takaichi rejected the Ministry of Finance’s original draft and incorporated demands from the opposition, resulting in a larger budget. The government and ruling coalition aim to formulate a draft for the initial FY26 budget by December 20 or so, and total expenditures may increase based on instructions given by the prime minister. That has fueled persistent concerns about increased supply in the FY26 JGB issuance plan.
Our baseline scenario calls for a rate hike at January Outlook Report meeting, when the outlook for the spring 2026 wage negotiations will have become clearer. However, recent communications from BoJ officials and a series of reports in the financial media1suggest the Bank may be preparing for a possible December hike. We think the decision will ultimately hinge on financial market developments and the Takaichi administration’s willingness to accept a rate hike before the end of the year. At present, neither the government nor the ruling coalition has expressed strong opposition to a rate increase, and concerns about an accelerated decline in the yen are gaining momentum in the media and public opinion. We would not besurprised to see the BoJ act somewhat earlier if the necessary conditions aresatisfied. We will be closely watching Governor Ueda’s remarks on December 1along with subsequent reactions from the government and ruling coalition. In anyevent, we think the Bank is likely to raise rates no later than the January meetinggiven the growing need to curb rising inflation expectations fueled by fiscalexpansion.