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Messages from upcoming Fed and BoJ events amid political turmoil
Long-term and super-long-term JGB yield scenario for September 16-19
The 10-year JGB yield is likely to remain rangebound this week. Mixed speculation about the outcome of the LDP leadership election, for which campaigning is set to begin on September 22 with votes cast on October 4, may again prevent a clear trend from forming. The super-long sector could come under steepening pressure if leading candidates indicate a willingness to consider the consumption tax cut sought by opposition parties. But given the difficulty of predicting the election result, short-term trades are likely to dominate, with positions being unwound the day after the election.
Under these circumstances, we think Fed and BoJ events scheduled this week could help curb the rise in long- and super-long-term bond yields and might even push them lower. First, we expect the Fed will decide to cut rates by 25bp at the September 16-17 FOMC meeting. If Chair Jerome Powell takes a dovish stance at his press conference, perhaps by highlighting the increased downside risks to the labor market, the market might fully price in three rate cuts in 2025 plus one or two more in 2026, potentially sending the 10-year UST yield below 4%. In this scenario, the relative attractiveness of super-long JGBs with their elevated yields could prompt buying by overseas investors and short-term investors.
Additionally, we forecast the BoJ will leave its policy rate unchanged at 0.5% at the Monetary Policy Meeting on September 18-19. Since no Outlook Report will be released, the market’s attention will focus on Governor Kazuo Ueda’s post-meeting press conference. However, it is unlikely that his comments will deviate significantly from the neutral stance on rate hike expressed by Deputy Governor Ryozo Himinoin his September 2 speech and press conference. Mr. Himino emphasized a focus on downside risks, stating that “at the moment, the risk of a larger-than-expected impact [from US tariffs] may deserve greater attention,” and noted that “we want to closely monitor the impact on the US economy.” Amid emerging concerns about deteriorating US labor market conditions, we do not expect Governor Ueda to express a bullish outlook on the US and Japanese economies this week. While he will probably not rule out an October rate hike, we think his news conference is likely to convey a rather cautious stance on a rate hike before the end of the year