Japan Economic & Financial Weekly

Long-term and super-long-term JGB yield scenario for June 15-19

JGB market developments for the week of June 15 will probably depend on 1)whether the US and Iran arrive at an agreement to end hostilities and 2) the “next move” by the Japanese and US central banks. A peace agreement would boost expectations for normalization of operations in the Strait of Hormuz, and the inflation risk premium being priced into long- and super-long-term bond yields would likely fall away. However, any agreement on a memorandum will be followed by detailed negotiations, leaving the risk of a breakdown in negotiations. The JGB market is likely to continue monitoring President Donald Trump’s social media posts and other news headlines. If it is reported that negotiations are going smoothly, we would expect to see bull-flattening pressure in the long- and super-long-term sectors, while if the negotiations encounter difficulties, a bear-steepening would be more likely.

With respect to the next move by the BoJ and the Fed, Japan’s central bank is expected to raise the policy rate from 0.75% to 1.00% at the June 15-16 Monetary Policy Meeting. The Bank appears likely to halt its tapering in FY27. Both of these events have already been priced in by the market. Attention is likely to focus on how Deputy Governor Shinichi Uchida, who will hold the press conference on behalf of Governor Kazuo Ueda, explains the decision to raise rates and how he describes the proximity of the next rate hike. For example, if he emphasizes that the BoJ raised rates in response to an increase in secondary inflationary pressures, the market would assume that the next rate hike is not far away, given that real interest rates remain deeply negative even with a policy rate of 1.00%.That would put bear-flattening pressure on the short- and medium-term sectors of the curve. On the other hand, if Mr. Uchida says that the rate hike followed an assessment that downside risks to the economy are limited and there is no pressing need to respond to upside risks to prices, that would likely lead to dip-buying, particularly in the medium-term sector.

On June 16-17 the Fed will hold a meeting of the Federal Open Market Committee, the first under new Chair Kevin Warsh. We think the FOMC will decide unanimously to leave the guidance range for the policy rate unchanged at 3.50% -3.75%. It has already been confirmed from both the official statement and the minutes that there was strong opposition at the Committee’s April meeting to the current wording indicating an easing bias. Chair Warsh may remove this language, which amounts to forward guidance, inasmuch as he said at his confirmation hearing on April 21 that “a regime change in the conduct of policy” is necessary and that “I don’t believe in forward guidance. I don’t believe that I should be previewing for you what a future decision might be.” The Fed’s use of the dot plot may also change going forward, and Mr. Warsh himself may not submit a dot plot at this meeting. The market will likely look for hints of the new chair’s policy reaction function at his post-FOMC press conference. If the 10-year UST yield moves in response to the market’s interpretation of his remarks (i.e., were they more hawkish or dovish than expected?), there could also be some impact on the10-year JGB yield.