Japan Economic & Financial Weekly

Long-term and super-long-term JGB yield scenario for August 10-14

We expect JGBs to be rangebound during the week of August 10, with the market’sattention likely to focus on the future mix of fiscal and monetary policy in Japan. USand Japanese monetary authorities conducted a coordinated intervention on behalfof the yen in the New York forex market on July 31, with the US selling euros andbuying yen. Finance Minister Satsuki Katayama and US Treasury Secretary ScottBessent each issued statements regarding the intervention early on the morning ofAugust 3 (Japan time). Ms. Katayama said the authorities would not hesitate tocarry out additional coordinated intervention and announced plans to utilize theFederal Reserve’s Foreign and International Monetary Authorities (FIMA) RepoFacility. We suspect this was intended to dispel concerns about the possibledepletion of Japan’s resources for currency intervention. For his part, Mr. Bessentstated on social media that “the FIMA Repo Facility is an important backstop” andurged the Fed to raise the limit on the facility, saying the US government “shouldencourage it to be upsized in the coming months.”

In an August 4 interview with the Nikkei, Secretary Bessent explained the rationalebehind the unusual decision to undertake coordinated intervention, noting that“many Asian currencies follow the Japanese yen currently” and that “the Asiancurrency crisis in the 1990s was triggered by a sharp weakening of the yen.” Manyanalysts and market participants have interpreted these remarks as reflectingconcerns that an accelerated decline in the yen could put upward pressure on the10-year US Treasury yield by lifting the Japanese equivalent. When asked in aninterview on January 20 about the rise in the 10-year UST yield, Mr. Bessent said,“I think it’s very difficult to disaggregate the market reaction from what’s going onendogenously in Japan. So Japan over the past two days has had a six standarddeviation move in their bond market, ... which would be the equivalent of a 50bpmove in US ten year.” This comment suggests he is closely monitoring the impactof rising Japanese bond yields on the 10-year UST yield.

Secretary Bessent appears to regard the effects of currency intervention as beingtemporary. In an interview with CNBC on August 4, he remarked that “at the end ofthe day, you can give market signals with intervention. But it’s policy that turns it.”With respect to BoJ monetary policy, he said that “I’m not going to prejudge whatthe BoJ should do. (...) I believe [Governor Kazuo Ueda] will do what is needed.”He appears keen for the BoJ to continue raising rates to dispel concerns that it hasfallen behind the curve. Separately, the Nikkei cited comments encouraging Japanto pursue policies aimed at keeping inflation in check, including the view that “[TheTakaichi administration will] have to decide, but you could do one of two things: Youcould have [a consumption tax cut], or you could try to get inflation down. If it wereme, I would try to get inflation down.”Although no major events are scheduled during the week, there are a number ofpotential catalysts. First, any information that fuels anticipation of a September rate hike would likely put bear-flattening pressure on the JGB curve. Conversely, anyinformation that undermines rate hike expectations -- for instance, indications thatthe Takaichi administration is reluctant to support an early rate hike -- wouldprobably lead to a twist-steepening of the curve. Attention will also focusincreasingly on the initial budget requests for FY27, likely to be submitted by theend of August. The curve is likely to bear steepen if expectations of larger budgetrequests pick up, while some degree of bull flattening is possible if the governmentmakes a serious attempt to secure funding for the consumption tax cut on fooditems. As more time will be needed before the outcome is known, JGBs are likelyto be rangebound this week.