Japan Economic & Financial Weekly

JGB market outlook for October 19-23

The 10-year JGB yield is likely to enter a period of consolidation in the week of October 19 following a sharp decline the previous week. We expect dip-buyers to emerge at yields near 3%. After hitting an intraday high of 3.115% on September25, the 10-year yield turned lower last week, quickly breaking below the 3%threshold. Supply/demand concerns had eased following the uneventful 10- and30-year JGB auctions the week before, and a global sell-off in AI- and semiconductor-related equities prompted “risk-off” buying of government bonds for the first time in a while. Positive comments on investments in long- and super-long-term JGBs by executives at several major banks in interviews with the media also encouraged short-covering. Factors that could push yields higher -- including uncertainty in the Middle East, the BoJ’s terminal rate, and concerns about theFY27 budget and JGB issuance plan -- remain in play. However, markets cannot move in one direction indefinitely, and we would not be surprised if a sense emerged, even if temporarily, that these factors have been fully priced in.

The Takaichi administration’s repeated rejection of reflationary policies may be helping to stabilize long- and super-long-term JGB yields by easing concerns about the BoJ falling behind the curve. The administration has stepped up its public messaging repudiating a reflationary policy stance ever since the Japan-US summit on September 22. At her September 25 press conference, Prime Minister Sanae Takaichi revealed that “President Trump said the weakness in the yen was making trade difficult for the US” (translated by MUMSS; the same applies to all quotations in this section). Finance Minister Satsuki Katayama and Economic and Fiscal Policy Minister Minoru Kiuchi each emphasized at their press conferences the same day that “the Takaichi administration has not adopted reflationary policies.” Ms. Katayama has appeared in media interviews and other forums day after day, surprising market participants with unusually candid remarks. In a September 25 interview with Bloomberg, for example, she said that “the well-known investor Stanley Druckenmiller visited today,” adding, “he said that some people on the US side believe that the central bank governor’s hands are tied in Japan and that there are reflationists in the Takaichi administration.” In a television program aired late in the evening on October 2, she stated, “There is also the question of how the government as a whole is perceived. What economists participating in high-level government meetings write can also influence those perceptions.” President Donald Trump’s expression of his concerns about yen weakness at his meeting with the Japanese prime minister appears to have made dispelling its reflationary image a key priority for the administration.

Ms. Takaichi subsequently emphasized at a plenary session of the Lower House on October 8 that “Japan is currently not experiencing deflation in the sense of a sustained decline in prices, and this is not a phase that requires so-called reflationary policies.” This came close to a declaration that Japan had finally exited deflation, and the significance of her remarks to the Diet cannot be ignored. Speaking at an event in Tokyo on October 15, Mr. Kiuchi said that “reflationary policies are not what we need now” and that “we are not seeking a relaxation of fiscal discipline.” He also said that “it is important to leave [monetary policy] to the Bank of Japan.” Against this backdrop, we believe it has become more difficult for the government to push back against additional BoJ rate hikes, at least for the time being. Regarding attendance at Monetary Policy Meetings, Mr. Kiuchi said, “I would of course like to continue attending when my schedule permits, as it is part of my duties” (Nikkei QUICK News, October 16). For now, however, we think he is likely to refrain from making remarks calling on the Bank to reconsider a rate hikedecision.1These developments could help compress the risk premia embedded in the long- and super-long-term sectors by easing concerns about the BoJ falling behind the curve. Although market participants are likely to remain skeptical of theadministration’s true intentions, we think a temporary truce is possible until thegovernment’s FY27 budget proposal and JGB issuance plan are unveiled.

Forecast range (intraday basis):

10-year JGB yield: 2.850%–3.000%

30-year JGB yield: 3.850%–4.050%