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10-year JGB yield seen treading water as market monitors government-BoJ relationship and “initial momentum” of 2026 wage talks
Long-term and super-long-term JGB yield scenario for November
We expect the 10-year JGB yield will hover in and around the 1.6% range in November amid an absence of obvious catalysts. The busy October political calendar -- including the LDP leadership election, selection of a prime minister, and formation of a cabinet -- is finally over, and neither the Fed nor the BoJ will hold a policy-setting meeting this month.
As we wrote in the October 27 issue of this report, the narrative of a rising fiscal risk premium driven by expansionary fiscal policy in the post-Ishiba era has largely run its course. This shift is attributable to several factors: the LDP’s new partnership with the Japan Innovation Party ("Ishin"), which favors extensive administrative and fiscal reform; the appointment of former Ministry of Finance official Satsuki Katayama as finance minister; and the decision that eliminating the consumption tax on food and beverages for two years will no longer be an urgent political priority but will be viewed as something to be discussed moving forward.
Although there is still talk of increased fiscal expenditures -- including a reduction in the provisional gasoline tax rate and an early increase in defense spending to 2%of GDP -- the measures being discussed are not that large in terms of the overall budget. Moreover, the fiscal narrative is likely to have less impact at a time of arising stock market and sustained high approval ratings for the Takaichi cabinet. Sanae Takaichi’s "responsible fiscal stimulus" does not have deficit-financing bond issuance as its objective and will probably start by using whatever funds are available. While tax increases are difficult to implement when the cabinet has a low approval rating, an administration that has accumulated political capital through strong public support has greater scope to raise taxes 1* -- the Abe cabinet, for example, successfully raised the consumption tax rate twice.
With respect to the Bank of Japan, Governor Kazuo Ueda’s reference to the "initial momentum of the spring 2026 wage negotiations" (at his October 30 press conference) as a key factor in future rate hike decisions is likely to lead to a variety of speculation. Market participants will probably be watching comments from Policy Board members and first-half earnings reports from companies with fiscal years ending in March. However, there is little in November that would enable us to make a definitive assessment of such "momentum," which makes it difficult to predict the timing of the next rate hike. Under these circumstances, we think attention is also likely to focus on the distance between the Takaichi cabinet and the Ueda BoJ. As noted in the "BoJ watch" section below, Governor Ueda probably emphasized the spring wage talks at his October 30 press conference at least partly in consideration of the new administration. Once the government and central bank have had more opportunities to communicate and coordinate, we expect the administration will develop a deeper understanding of the Bank’s policy stance, and particularly its price stability mandate. Furthermore, with US Treasury Secretary Scott Bessent making some unusual demands of Japanese monetary policy,2thegovernment may find itself forced to accept a rate hike if the market prices in a dovish BoJ policy stance and the yen’s decline gathers speed.
In view of the above, we project the 10-year JGB yield will rise toward 1.7% if the yen continues to weaken in the direction of (a USD/JPY rate of) 160 and fuels expectations of a December rate hike. We think the impact would be limited if the exchange rate stabilizes in the mid-150s. The bull flattening (unwinding of the earlier bear steepening) in the super-long sector is likely to pause before long. However, purchasing by investors who missed earlier opportunities to buy, coupled with expectations of rebalancing by pension funds against a backdrop of rising equity prices, are seen providing support for supply/demand and fueling meaningful buying on dips.
1* Finance Minister Katayama stated at an October 30 press conference that, regarding the review of financial income taxation, "Even if discussions take place, the scope would likely be limited to ultra-high-income earners," indicating that a review has not been ruled out.