To read the full report, please download PDF.
BoJ continues building case for rate hike amidMiddle East turmoi
Long-term and super-long-term JGB yield scenario for April 6-10
We project long- and super-long-term JGB yields will remain elevated in the week of April 6. Yields may fall to some extent if the US and Iran embark on concrete ceasefire negotiations. But there is also a real possibility that military clashes between the US and Iran will intensify, in which case the focus will continue to be on global inflation risks driven by high crude oil prices and supply shocks. The outlook for the Middle East situation remains highly uncertain, and the longer the de facto closure of the Strait of Hormuz drags on, the greater the likelihood of upside risks to prices. Bear steepening pressures may re-emerge around the 30-year JGB auction on April 7 due to position adjustments. We expect the 10-yearJGB yield to climb into the 2.4% range then, with dip-buying around the 2.5% level likely to serve as a backstop.
We also anticipate dip-buying in the short- and medium-term sectors. Domestic investors are thought to have sold off low-coupon super-long JGBs in the Jan-Mar quarter, creating a need to reinvest the proceeds. There is heavy speculation of a rate hike at the April 27-28 Monetary Policy Meeting, but we think the short- and medium-term sectors have already priced in the next hike. Speculative media reports on whether the BoJ will raise rates at the April meeting are likely to come a little later. In the event of expectations that the Bank will forgo a rate hike in April, we would expect the curve to twist steepen, with buybacks in the short- and medium-term sectors. If the BoJ is thought to be considering raising rates, the curve’s basic response will probably be a bear flattening, but any further upside for yields will probably be limited if that has already been priced in.