To read the full report, please download PDF.
10-year JGB yield seen assuming upward bias with an eye on Upper House election and Trump's "letter"
Long-term and super-long-term JGB yield scenario for July 7-11
We expect the 10-year JGB yield to trade with an upward bias this week. Factors with the potential to push it higher include 1) the 20-year JGB auction on July 10,2) fading speculation of an early Fed rate cut, and 3) early developments in the Upper House election campaign. See "Key events" below for more on the first factor. With respect to the second, the official US payroll report for June, released on July 3, showed a larger-than-expected increase in nonfarm payrolls and discouraged speculation of a July rate cut. State and local governments were responsible for more than half the growth in nonfarm employment, while growth in private-sector jobs was cut in half, suggesting that labor market conditions are weak overall. However, we think expectations of an early Fed rate cut will remain subdued, at least until the June inflation data are released (CPI on July 15 and PPI on July 16). If early rate cut hopes fade further, putting upward pressure on the 10-year UST yield, this could lift the 10-year JGB yield as well. As for Japan’s Upper House election, if the ruling coalition is reported to be having a tough time of it early in the campaign, both long- and super-long-term JGB yields could rise on concerns that the consumption tax cut sought by the opposition is more likely to be implemented.
One factor that could depress JGB yields is the outcome of the tariff negotiations with the US. The market impact is likely to be small if the US decides to extend the "pause" on additional tariffs after it expires on July 9, but if the US administration announces that it will unilaterally impose a relatively high tariff of 30% to 35% on Japanese imports, we project the 10-year JGB yield will fall on concerns about the mounting risk of a recession (and a corresponding delay in the resumption of BoJ rate hikes). That said, a breakdown of the negotiations would probably hurt the Ishiba cabinet in the upcoming election, leading to a bull/bear steepening of the yield curve.
