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10-year JGB yield seen remaining sensitive to downward pressure
Long-term and super-long-term JGB yield scenario for June 16-20
We expect the 10-year JGB yield will hover around 1.4% this week, although there could be some increased short-term volatility depending on the news headlines. As noted in last week’s report, it is likely to remain more sensitive to downward pressure (due to short-covering) than to upward pressure now that supply/demand concerns in the super-long sector have paused.
News that Israel had bombed Iran prompted a flight to quality and sent stocks lower and bonds higher in Tokyo markets in the morning session on June 13. The10-year JGB yield could move lower if concerns about geopolitical risk pick upagain this week.1However, NYMEX crude oil futures rose sharply on the news andas of this writing were trading around USD74 per barrel. Further gains in oil pricescould halt the 10-year yield’s decline by fueling speculation of a renewed increasein import prices as a result of higher commodity prices. Whether the 10-year JGByield is affected more by geopolitical risk or rising oil prices is likely to depend onthe reactions of the 10-year UST yield and USD/JPY.
Statements by US President Donald Trump at the G7 leaders’ summit IN Kananaskis, Canada, on June 15-17 have the potential to trigger market turmoil. The US-Japan trade negotiations are entering a crucial phase, and the Japanese government is trying to arrange a one-on-one meeting between President Trump and Prime Minister Shigeru Ishiba during the summit. NHK News reported on June12 that some kind of agreement is now in sight in the Japan-US tariff talks. Economic revitalization minister Ryosei Akazawa told a group of reporters on June13 that "there will definitely be a meeting between the US and Japanese leaders "and expressed the view that "Japan will be treated differently from other nations (ifwe come to an agreement)." If the US agrees to lower the 25% tariff it has imposedon automobiles and related products, we think stocks would rise and bonds wouldfall. The opposite is likely to happen if the two sides fail to reach an agreement,raising further concerns about the economic outlook.
At the Monetary Policy Meeting on June 16-17, we expect the BoJ will maintain its existing plan for reducing bond purchases through the end of FY25 and indicate its intention to scale back the size of those reductions in FY26. The market fully expects the policy rate to be left on hold at 0.5%, and if that is the case there will probably be little additional impact on the market. At BoJ Governor Kazuo Ueda’spost-meeting press conference, the focus will be on 1) the reasons behind the Bank's decision on the pace of future reductions in its bond purchases, 2) the governor's view on the highly uncertain outlook, and 3) key points in the June Tankan, due out on July 1. See the "Key events" section below for more on the MoF meeting with primary dealers expected to take place on June 20
