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Lingering Middle East uncertainty and concerns that BoJ is falling behind the curve
Long-term and super-long-term JGB yield scenario for April 20-24
We expect JGBs to trade within their recent range and largely without direction during the week of April 20. Expectations for an end to the military conflict between the US and Iran picked up last week. On April 16 (US time), President Donald Trump told reporters at the White House that the next round of talks aimed attending the war would probably take place later that week. Bloomberg reported on April 16 that the US and Iran are considering a two-week extension of the current ceasefire, which expires in the week of April 20. If expectations grew for an end to the conflict in the Middle East, we think inflation concerns would fade as crude oil prices subsided, thus helping stabilize long- and super-long-term JGB yields.
On the other hand, the weakness in the yen and expectations of BoJ monetary policy warrant continued attention. There is currently no indication from the Bank that it will consider a rate hike at the April 27-28 Monetary Policy Meeting, and at her press conference following the meetings of G7 and G20 finance ministers and central bank governors, Finance Minister Satsuki Katayama made remarks that were seen as an attempt to discourage the Bank from raising rates (see “BoJ watch” section below). The OIS market is now pricing in less than a 20% chance of an April rate hike.
If USD/JPY climbs above 160 during the week of April 20, we expect JGB yields --and long-term yields in particular -- will be pushed higher due to concerns that the BoJ has fallen behind the curve. Something similar could happen if the government’s opposition to a rate hike casts doubt on the possibility of tightening in June or beyond. On April 20, the Bank will release the March edition of its Opinion Survey on the General Public’s Views and Behavior. A rise in median expectations of changes in price levels among consumers (Graphs 1 and 2) could affect the inflation expectations of market participants and thus push bond yields higher. We anticipate a bull flattening of the JGB curve if progress is made in ending the military conflict between the US and Iran, while a bear steepening is likely if the Middle East situation worsens.