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Long- and super-long-term JGB yields probing Takaichi's commitment to "high-pressure economy"
Long-term and super-long-term JGB yield scenario for November 17-21
We see the 10-year JGB yield trying to establish a solid foothold above 1.7% this week, with concerns about Prime Minister Sanae Takaichi’s “responsible fiscal stimulus” the main factor pushing long- and super-long-term yields higher. If the 20-year JGB offering on November 19 ends with similarly weak results to last week’s30-year auction, we anticipate an increased risk of a self-fulfilling rise in bond yields in which fiscal expansion concerns prompt investors to refrain from buying, sending long- and super-long-term yields higher, which in turn is interpreted as a signal of mounting fiscal risk and leads to further investor restraint. Caution is therefore warranted. Attention will also focus on the scale of the supplementary budget. The government wants to have the cabinet approve its economic package on November 21. The FY25 supplementary budget that will fund the package is already expected to be slightly larger than last year’s extra budget (JPY13.9trillion). But talk of spending closer to JPY20 trillion could fuel concerns about a substantial increase in JGB issuance. Conversely, additional upward pressure on yields would likely be limited if the budget is not seen exceeding JPY15 trillion.
We project the curve steepening move observed over the last two weeks will continue. Not only is a 20-year auction scheduled this week, but there are growing concerns among market participants that Prime Minister Takaichi will make a serious commitment to achieving a “high-pressure economy” (see “BoJ watch ”below). There is also a sense of resignation, with investors seeing a December rate hike as being unlikely due to Ms. Takaichi’s opposition to an increase before the end of the year. One risk scenario involves an accelerated decline in the yen. If USD/JPY approaches 160, market participants may conclude the PM will be unable to ignore the currency weakness given its potential to reignite inflation. That could leave her no choice but to tacitly accept a BoJ rate hike, potentially driving a bear flattening or bear/bull flattening of the yield curve.