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Year-end yield curve fluctuates amid uncertainty over FY26 JGB issuance plans
Long-term and super-long-term JGB yield scenario for December 22-26
The 10-year JGB yield tests the upside in the coming week. If the government’s draft budget or the JGB issuance plan for FY26 lead to growing concerns about fiscal expansion and a deterioration of JGB supply/demand, the 10-year yield may move clearly above the key 2% threshold. On the other hand, we think investors will engage in buybacks if total expenditures in the FY26 budget do not substantially exceed the JPY122.4 trillion or so in budget requests. We suspect the super-long sector will also stabilize somewhat once the FY26 JGB issuance plan confirms a reduction in supply.
In the previous Japan Economic & Financial Weekly, we wrote that the outcome of the FY26 budget formulation process could be a potential upsetting factor. Kyodo News reported on December 16 that it had learned that total expenditures in the government’s FY26 budget proposal were expected to exceed JPY120 trillion. Since total budget requests as compiled by the Ministry of Finance in August had amounted to JPY122.4 trillion, the news does not come as a surprise. We think that as long as total expenditures are within the JPY120-130 trillion range, a large increase in calendar-base market issuance will be avoided1even if total JGB issuance is higher than in the initial plan for FY25. However, calendar-base market issuance might also have to increase if total expenditures approach JPY130 trillion.
At the Monetary Policy Meeting on Friday, the BoJ decided to raise its guidance target for the policy rate -- the uncollateralized overnight call rate -- from “around0.50%” to “around 0.75%.” In the guidelines for monetary policy conduct, the BoJ remained of the view that “real interest rates are at significantly low levels” and that “if the outlook for economic activity and prices...will be realized, the Bank, in accordance with improvement in economic activity and prices, will continue to raise the policy interest rate and adjust the degree of monetary accommodation.” This report is being written prior to Governor Kazuo Ueda’s press conference later on Friday, and we will also be watching his December 25 speech to the Meeting of Councillors of Keidanren to see whether he expects the Bank to achieve the 2%inflation target “in a sustainable and stable manner” and how he feels about the upside risks to economic activity and prices. Growing concerns about fiscal expansion would likely lead to bear steepening pressures on the curve, while expectations of an acceleration of BoJ rate hikes would tend to exert flattening pressures.
We plan to review our forecasts for the 10-year JGB yield and the JGB curve in2026 and beyond in our next Japan Economic & Financial Weekly(Japanese set for release on December 25).