Bank of Japan officials see no need to intervene in the JGB market, even though they expect volatility to persist, and attribute the recent rise in yields to market assessments of the economic and inflation outlook as well as future policy moves, MNI understands.
Bank officials see uncertainty over the pace of policy adjustments and the eventual terminal rate deterring steady demand, while fiscal expansion under Prime Minister Sanae Takaichi and concern that a weak yen will fuel persistently high inflation are also adding upward pressure.
Concerns about higher yields are limiting investors’ willingness to keep buying JGBs after taking on significant supply at recent auctions. Officials judge that it is natural for rates to reflect market views on the economic and policy outlook, and are closely watching how the government’s fiscal 2026 budget, including the scale of JGB issuance and any increase in 10-year supply, will affect market conditions.
The 10-year JGB yield, which climbed to 1.950% on Friday, the highest level since July 2007, is being pushed up by pressure from the two- and five-year tenors as well as the super-long end. Issuance of two- and five-year JGBs has risen to fund the supplementary budget, while investors remain cautious about extending duration.
POLICY-RATE FOCUS
JGB market participants remain alert to the risk of higher rates amid stubborn inflation and see the potential for a higher terminal rate. By contrast, foreign-exchange market players are skeptical about additional adjustment beyond a move to 0.75%, on the premise that Takaichi may limit the BOJ’s ability to raise rates smoothly. (See MNI POLICY: Concerns Grow Over Takaichi's BOJ Board Picks)
Market participants are focused on Governor Kazuo Ueda’s comments at the Dec 19 post-meeting press conference, when the BOJ is expected to lift the policy rate to 0.75% from 0.50%. (See MNI POLICY: Ueda Sharpens Dec Rate Hike, Risks Credibility) However, Ueda is unlikely to outline a clear rate-hike path, maintaining a data-dependent stance that keeps the door open to further increases and preserves uncertainty around the future policy rate.
BOJ officials are also perplexed that the narrowing yield gap between Japan and the U.S. has not contributed to yen appreciation.
