Japan Economic & Financial Weekly

Long-term and super-long-term JGB yield scenario for July 6-10

Long- and super-long-term JGB yields are likely to test the upside during the week of July 6 in the wake of what has been called the “Basic Policy shock.” Last week the yen and bonds weakened through July 2 in a move that media outlets referred to as the “Basic Policy shock.” The catalyst was the June 30 release of a draft of the government’s economic policy blueprint (“Basic Policy on Economic and Fiscal Management and Reform”). The market viewed the statement that “appropriate monetary policy conduct is also extremely important (translated by MUMSS)” as an attempt to rein in further rate hikes by the Bank of Japan, stoking concerns that the BoJ could fall behind the curve. This week, those concerns are likely to be conducive to higher long- and super-long-term yields. One key focus will be the response of the 10-year JGB yield to the USD/JPY exchange rate. Specifically, the yen strengthened against the dollar starting on the afternoon of July 2 JST amid worries about possible government intervention on the currency market, but the 10-year yield continued to rise. Even if the government actually intervenes on behalf of the yen starting this weekend, we see little downside for the 10-year yield unless concerns about the BoJ falling behind the curve are dispelled. We also see limited scope for further outperformance of super-long JGBs while uncertainty lingers over the funding of proposed public- and private-sector investments totalling more thanJPY370 trillion.