Japan Economic & Financial Weekly

JGB market outlook for November

In November, we expect the benchmark 10-year JGB yield to be driven byspeculation about fiscal policy under the Takaichi administration once the marketdigests the results of the US midterm elections. We see two main scenarios for theNovember 3 elections. In the first, Republicans retain majorities in both chambersof Congress, boosting expectations of fiscal expansion under the Trumpadministration, lifting the 10-year UST yield, and putting upward pressure on theJapanese equivalent. In the second, Congress is split or the Democrats regaincontrol of both houses, and reduced prospects for US fiscal stimulus send the 10-year UST yield lower. A Democratic sweep could also fuel expectations of morerestrictive AI regulation, putting downward pressure on yields via lower stockprices. This would weigh on the 10-year JGB yield as well. Historical midtermelection patterns and recent polls suggest the second scenario is the more likelyoutcome. The initial response of the 10-year JGB yield may therefore be to turn lower.

After markets digest the results of the US midterms, concerns over Japanese fiscal policy are likely to limit further declines in the 10-year JGB yield. No BoJ policy meeting is scheduled for November. However, new developments and reports on fiscal policy could emerge ahead of the expected December release of the FY27budget draft, tax reform outline, and JGB issuance plan. Attention will focus on funding for the consumption tax cut along with the scale and funding of increased defense spending and investments in growth and crisis management. However, the JGB market is unlikely to move decisively in either direction until specific budget figures and JGB issuance amounts are revealed.

Equity weakness, particularly in AI-related stocks, has been a key driver of the recent decline in the Japanese 10-year yield and continues to warrant attention. Although the sell-off appears to have paused for now, a Democratic sweep in the US midterms could trigger further share price declines on expectations of more restrictive AI regulation. The BoJ also decided at the policy meeting on Friday to step up its ETF sales. Although the amounts are small, we will be watching to see if this adds to selling pressure on equities in the event that market sentiment turns bearish.

Forecast range (intraday basis):

10-year JGB yield: 2.650%–3.000%

30-year JGB yield: 3.700%–4.100%