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Directionless trading likely as market ponders outlook for US-China "detente"
Long-term and super-long-term JGB yield scenario for May 19-23
The 10-year JGB yield is seen fluctuating without a sense of direction this week. Last week the US and China agreed to temporarily lower their tariffs and to establish a framework to continue the negotiations. Expectations of a detente between the two nations sent global financial markets into "risk-on" mode, and the10-year JGB yield moved higher as well. The probability of another BoJ rate hike in2025 being priced in by the OIS market has also recovered. We expect the 10-yearJGB yield will trade without a clear direction this week, rising on hints of progress in the US trade talks with Japan and other countries and falling on news that stokes concerns about the outcome of the talks. The US and Japanese finance ministers may meet at some point during the May 20-22 gathering of G7 finance ministers and central bank heads, and it has been reported that the US and Japanese governments are ironing out the details of a third round of cabinet-level trade talks that could take place as early as this week.
As noted in last week’s report, we continue to watch speculation regarding the BoJ’s interim review of the reductions in its bond purchases at the June 16-17MPM and the outcome of the debate over a consumption tax cut ahead of the summer Upper House election. With respect to the interim review, the BoJ’s Financial Markets Department is set to hold a 22nd round of Bond Market Group meetings on May 20-21. If some new information emerges regarding the review or the Bank’s bond-buying plans in FY26 and beyond, it will probably influence the 10-year JGB yield. While we expect the BoJ will continue cutting its bond purchases inFY25 as planned, it might potentially hint at a review of the super-long sector, where some concerns about supply and demand have been noted. Although we see this as a low-probability outcome, it would probably give a boost to the super-long sector. Meanwhile, if the BoJ indicates it will continue dialing back its monthly purchases at the current rate (JPY400 billion each quarter) in FY26 and beyond, implying that monthly purchases would fall to JPY1.2 trillion by the end of FY26,that could raise concerns about the private sector’s ability to absorb future JGB issuance.
The discussions over a consumption tax cut also warrant close attention. On May14, Komeito policy chief Mitsunari Okamoto indicated his party would be willing to accept the issuance of deficit-financing bonds as a source of funding for the economic package that the ruling coalition is considering compiling in mid-June. Although an inner circle of officials on the LDP’s tax commission (including panel chairman Yoichi Miyazawa) is trying to build a consensus around keeping the consumption tax at current levels, Masaji Matsuyama, leader of the LDP caucus in the Upper House, has submitted to Secretary-General Hiroshi Moriyama a proposal to cut the tax on foods to 0% for about two years (Apr 24) and is trying to make this a plank in the party’s platform for the Upper House election. An official LDP decision not to seek a consumption tax cut could cause a schism in the party and, depending on the election results, lead to a political "situation."
We have revised up our JGB yield forecast ranges, mainly for 1H FY25, after supply/demand concerns sent the 30- and 40-year JGB yields above the top end of our previous ranges. We project that yields will remain mostly elevated between now and the Jul-Sep quarter as the market digests the impact of the government’s economic package and the results of the Upper House election, which is expected to be held on July 20. Beyond that, we forecast a series of gradually lower highs for yields in response to (expectations of) reduced issuance of super-long JGBs in the JGB issuance plans for FY25 and FY26. See the "Market Forecast" at the end of this report for details.
