To read the full report, please download PDF.
Will fiscal concerns continue to drive JGB yields higher?
Long-term and super-long-term JGB yield scenario for November 25-28
We expect JGBs will continue to face heavy upside resistance this week. Lastweek’s sharp sell-off appeared to pause in the morning session on Friday, and wesee room for a reversal of the rapid rise in yields. That said, concerns about theTakaichi administration’s “responsible and proactive fiscal stimulus” are likely tocontinue acting as a drag on the market.
The cabinet is set to approve an FY25 supplementary budget to fund thegovernment’s economic package as early as November 28. Prior to that, theMinistry of Finance will hold its regular meetings with JGB investors and JGBmarket “special participants” (primary dealers) on November 27. Discussions areexpected to cover the FY25 JGB issuance plan and include preliminary talks on theFY26 issuance plan. Part of the increased funding needs in both the FY25supplementary budget and the FY26 initial budget will presumably be met throughhigher JGB issuance. We think the prospect of an expanded supply of coupon-bearing JGBs will remain a key focus for the bond market and will continue to capany upside for JGBs. We will also be watching the outcome of the 40-year auctionon November 26. The tender comes at a time of increasing investor caution andunstable market conditions. Both the 20- and 30-year offerings earlier this monthended with weak results, and a poor outcome for the 40-year auction would likelyweigh on the super-long sector.
Our risk scenario involves an accelerated decline in the yen. Should USD/JPYclimb toward the 160 level, some think Prime Minister Sanae Takaichi would beunable to ignore yen weakness (which risks reigniting inflationary pressures) andwould have little choice but to accept a BoJ rate hike. That would probably putupward pressure on yields, primarily in the medium- and long-term sectors,although it could also provide support for super-long JGBs (putting bear-flatteningpressure on the yield curve).
In the past week the 10-year JGB yield breached the 1.75% upper bound of our 3QFY25 (Oct-Dec) forecast range. The risk highlighted in the November 17 edition ofthis report -- of a self-reinforcing rise in yields driven by fiscal expansion concernsthat lead investors to refrain from buying, thereby lifting long- and super-long-termyields and sending a perceived signal of increased fiscal risk, which in turn promptsmore investors to stay on the sidelines -- now appears to be materializing. We planto review our yield forecasts for the current quarter and beyond in the upcomingquarterly issue of this report, scheduled for release in Japanese on November 28.