MNI POLICY: BOJ Sees Higher JGB Yields Ahead of FY-End
Bond investors, concerned about the risk of rapid rate hikes should a weak yen accelerate inflation, are holding off on JGB purchases ahead of the March 31 fiscal year-end, a move Bank of Japan officials see as pushing yields higher and increasing volatility, MNI understands.
Officials regard it as natural for yields to move in line with market views on the BOJ’s monetary policy and inflation outlook, as well as overseas market developments, unless market functioning deteriorates, and say the BOJ has no plans to alter its non-intervention stance. (See MNI POLICY: BOJ Unshaken By JGB Volatility)
While JGB supply-demand conditions remain favourable following the Ministry of Finance’s supportive issuance plan for fiscal 2026, including reduced super-long JGB issuance and no increase in 10-year bond supply, bond-market participants remain concerned about the risk of rapid and sizable rate hikes, driven by perceptions the BOJ could fall behind the curve as yen weakness continues to exert upward pressure on inflation. (See MNI POLICY: Risk BOJ Accelerates Hikes Mid-2026)
Despite a narrowing interest-rate gap between Japan and the U.S., the yen has been hovering around JPY157 per dollar following a roughly 4% depreciation since mid-October when Sanae Takaichi became prime minister, maintaining upward pressure on import prices that is expected to feed through to consumer inflation. Takaichi’s plans to boost government spending have raised concerns over Japan’s fiscal health, adding pressure to the currency.
The BOJ views the recent rise in JGB yields, which were trading at 2.141% on Tuesday, as partly contributing to higher terminal rate expectations in the bond market. Investors have raised their projections for the terminal policy rate to around 1.25% or 1.50%, from 0.75% or 1.00% anticipated in late 2025. Officials also see the recent rise in JGB yields as having partly driven higher terminal rate expectations, and judge that some JGB players have fallen behind the curve.
BUYING INTEREST
Although higher yields prompted some buying interest, it proved short-lived as investors have continued to hold back ahead of the fiscal year-end.
Commercial banks have also refrained from actively trading JGBs to lock in profits, having already improved earnings through higher loan rates.
In December, the BOJ dropped its assessment that underlying CPI inflation was likely to remain sluggish, an outlook previously attributed mainly to the pace of economic growth, reflecting the government’s economic stimulus package and reduced downside risks to the U.S. economy.
Meanwhile, the BOJ expects year-on-year core CPI inflation to fall below 2% in the first half of fiscal 2026 starting April 1, allowing the bank to refrain from rushing additional policy-rate hikes.
