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Market seen reacting to statements by LDP candidates without clear sense of direction
Long-term and super-long-term JGB yield scenario for September 22-26
We expect the 10-year JGB yield will start the week by moving higher after twoPolicy Board members (Hajime Takata and Naoki Tamura) cast dissenting votes infavor of a rate hike at Friday’s Monetary Policy Meeting. The 10-year yield is thenlikely to trade nervously given the uncertain outcome of the LDP leadershipelection. Campaigning will begin on Monday, September 22, and a meeting will beheld to give party hopefuls an opportunity to deliver their policy statementspeeches. There will then be a joint press conference and debate on September23, followed by a debate and speeches in Tokyo on September 24 and morespeeches in Nagoya on September 26. The JGB market is likely to react nervously to news reports discussing candidates’ remarks and internal party dynamics.
When looking at individual candidates, the JGB market is asking 1) how much the Japanese fiscal deficit might expand (i.e., the likelihood of increased bond issuance) if they became LDP president and prime minister, and 2) whether they would allow an early resumption of BoJ rate hikes. With respect to the first question, a proactive stance on fiscal expansion by leading candidates would be conducive to a bear steepening of the curve, while the converse would encourage a bull flattening. As for the second issue, remarks suggesting candidates would be willing to accept an early rate hike would tend to favor a bear flattening of the curve, while indications that they would reject an early hike would be supportive of a bull steepening.
That said, the momentum or dynamics of the contest could shift suddenly in the two weeks until votes are cast on October 4. It is difficult to predict Diet members 'votes now that all LDP factions other than the Aso faction have been dissolved. Furthermore, the stability of policy conduct in the next administration will depend on the outcome of discussions with opposition parties on expanding the coalition or pursuing policy cooperation, but clarity on this front is unlikely to emerge until after the LDP election. We think investors will take a wait-and-see stance in themeantime. A clear directional trend is unlikely to form despite daily fluctuations, andwe do not anticipate any significant shifts in market positioning.