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Will Ueda BoJ become an "inflation fighter"?
Long-term and super-long-term JGB yield scenario for June 8-12
We expect the JGB market to tread water in the week of June 8. Short coveringpicked up in the previous week following solid results for the 10-year JGB offering,and the 10-year JGB yield briefly plunged to 2.565%. Demand for cash bonds torebalance portfolios in response to high stock prices appears to have arrested thepreceding rise in yields. After short covering ran its course, however, the 10-yearyield rose back into the mid-2.6% range. External factors—such as stallednegotiations over an extension of the US-Iran ceasefire and the reluctance of USlong-term yields to decline further in the wake of solid economic data—togetherwith lingering concerns over fiscal expansion, including the Takaichiadministration’s consumption tax cut for food items and its economic policyblueprint, are likely to act as factors constraining further declines in long-termyields. Particularly close attention needs be paid to discussions on how to fund theconsumption tax cut. Meanwhile, buying may also prevail at times if external conditions improve -- for instance, with an agreement between the US and Iran to extend the ceasefire, or a downside surprise in employment in the May US jobs report on Friday evening (JST).
We project the BoJ will raise the policy rate from 0.75% to 1.00% at the Monetary Policy Meeting on June 15-16 (see the “BoJ watch” section below for details). A50bp hike, which some market participants have speculated about, appearsunlikely, and the market has priced in more than a 90% probability of a 25bp ratehike. In a speech on June 3, BoJ Governor Kazuo Ueda said that “the prescription[for a supply shock] now is different from the economic and price measures takenin the deflationary period,” making it clear that the Bank is conscious of the risk ofthe underlying inflation rate overshooting 2%. Additionally, his statement that theBoJ would seek to “[prevent] downward pressure on economic activity stemmingfrom rising prices” suggests the Bank has arrived at the same conclusion asWestern central banks.
The focus at the June meeting is therefore likely be on how much Governor Ueda refers to the possibility and necessity of accelerating the pace of rate hikes. Bloomberg News reported on June 4 that another rate hike is possible within the year amid an awareness of upside risks to prices. We also expect another rate hike in December, which would take the policy rate from 1.00% to 1.25%. The Ueda BoJ has so far been seen as proceeding cautiously with rate hikes, and the market has consequently priced in the risk that it may fall behind the curve. We think the JGB curve could face twist-flattening pressure if pre-meeting news fuels speculation that the BoJ is turning into an inflation fighter (though this seems unlikely).