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10-year JGB yield and JGB curve seen fluctuating on rate hike and LDP election speculation
Long-term and super-long-term JGB yield scenario for Sep 29-Oct 3 and for October
Long-term and super-long-term JGB yield scenario for the comingweek and for October
Long-term and super-long-term JGB yield scenario for the comingweek and for OctoberThe 10-year JGB yield is likely to experience significant volatility until the end ofOctober due to market speculation regarding monetary and fiscal policy.A key focus for monetary policy is whether the Bank of Japan will raise interestrates at the October 29-30 Monetary Policy Meeting. October brings numerousopportunities for Bank officials to speak, including Deputy Governor ShinichiUchida’s speech to the National Securities Industry Convention on October 2 andGovernor Kazuo Ueda’s participation in a talk in Osaka on October 3 (see "Keyevents" below for details). Upcoming data releases, such as the September BoJTankan on October 1 and the branch managers’ meeting on October 6, could alsohave a major impact on the rate hike decision. If the Tankan results are favorableand 1) Policy Board members hint at an additional rate hike in October (or the BoJactually raises rates at the October meeting), we could see upward pressure on the10-year JGB yield and bear-flattening pressures on the JGB curve. Conversely, if2) the Bank opts not to raise rates at the October meeting, we think the 10-yearyield would be pushed lower and the curve would experience bull-steepening pressures, although lingering expectations of an early rate hike would probably help to curb any decline in yields.
With respect to fiscal policy, we anticipate upward pressure on the 10-year JGB yield and bear-steepening pressures on the JGB curve if 3) expectations for fiscal expansion pick up in response to the results of the LDP leadership election on October 4, the subsequent prime ministerial election, or coalition talks with the opposition regarding policy cooperation and collaboration. Conversely, we expect downward pressure on the 10-year yield and bull-flattening pressures on the JGB curve if 4) expectations of expansionary fiscal policy fade due to the LDP election or subsequent political developments.1However, persistent pressure for fiscal expansion from the opposition parties would likely prevent a substantial decline in super-long JGB yields.
Our base case consists of scenarios (2) and (4). We therefore expect the 10-yearJGB yield to trade mostly sideways or work its way slightly lower, with the JGB curve undergoing a modest bull flattening. However, shifting speculation surrounding monetary and fiscal policy is likely to result in nervous yield action throughout the month. Additionally, investors should keep an eye on the risks posed by scenarios (1) and (3).
We have also revised our JGB yield projections, modestly raising our point forecasts and the lower end of our forecast ranges for 4Q 2025 in view of recent yield levels. See the "Market Forecast" at the end of this report for details.