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Nervousness over content and timing of "next moves" by Fed and BoJ
Long-term and super-long-term JGB yield scenario for August 25-29
We expect the 10-year JGB yield to be influenced this week by speculation regarding the content and timing of the "next moves" by the Fed and the BoJ. Fed Chair Jerome Powell will give a speech at the Jackson Hole policy conference at11pm JST on August 22, and BoJ Governor Kazuo Ueda is scheduled to participate in a panel discussion on "The Policy Implications of Labor Market Transition."
If Chair Powell emphasizes the increasing downside risks to the labor market or hints at a dovish stance by arguing that the inflationary risks posed by tariffs are smaller than initially assumed, expectations would strengthen for a resumption of rate cuts at the September FOMC meeting and beyond. That would put downward pressure on the 10-year UST yield and, by extension, the 10-year JGB yield. Conversely, expectations for a September rate cut would probably diminish if Mr. Powell says that the Fed needs to remain vigilant about the risk of temporary price increases having a sustained impact on inflation. This could send the 10-year US yield higher, prompting its Japanese equivalent to test the upside in the 1.6%range. However, we anticipate a certain amount of dip-buying demand for 10-yearJGBs and think a one-way increase in yields is unlikely.
It is unclear whether Governor Ueda will discuss BoJ monetary policy conduct during the panel discussion noted above (market participants seem to be looking forward to his jokes in English). If he notes that labor shortages have led to changing wage and price "norms" or expresses confidence in the sustainability of wage hikes, it could fuel market expectations for a rate hike at the October 29-30meeting or heighten concerns about an upward shift in the terminal rate, thus driving a bear flattening of the curve.
