Most BOJ watchers expect authorities to lift the benchmark interest rate by January
[TOKYO] Japan’s two-year government bonds fell, pushing yields to the highest level since 2008, tracking moves in the US ahead of the Bank of Japan’s (BOJ) policy decision.
The two-year yield, which is sensitive to monetary policy expectations, climbed 0.5 basis points to 0.885 per cent. Yields also climbed in the US overnight following weekly employment data that cast doubt on the outlook for further reductions this year after the US Federal Reserve cut interest rates this week by 25 basis points.
In addition to the moves in the US, “selling may be emerging from those betting on a hawkish tone ahead of Governor Kazuo Ueda’s press conference, even though he’s expected to be cautious”, said Kazuhiko Sano, chief strategist at Tokai Tokyo Securities.
The move comes ahead of the BOJ’s policy decision on Friday (Sep 19), where it’s widely expected to hold rates steady, with the market focused on any clues about a move next month or in December. The increase in yields on shorter-maturity debt coincides with rising yields for longer-dated debt, which is being driven by concerns about inflationary expectations as Japan’s government faces pressure to raise spending and reduce taxes.
The outlook is clouded amid uncertainty over tariffs as well as political risks after Prime Minister Shigeru Ishiba announced his plans to step down. Still, BOJ officials are of the view that it may be possible to raise the benchmark interest rate again this year, regardless of political instability, as economic conditions have developed in line with expectations, according to sources familiar with the matter.
Japan’s government bonds have lost 4 per cent so far this year and underperformed all of their global peers, according to Bloomberg data that track more than 40 markets and exclude currency fluctuations.
Most BOJ watchers expect authorities to lift the benchmark interest rate by January, with the proportion picking next month as the likely timing edged down after Ishiba’s resignation, according to a Bloomberg survey. Overnight index swaps show about a 58 per cent chance of a rate hike by the BOJ by the end of the year.
Ahead of Ueda’s press conference, Sanae Takaichi, a conservative hardliner known for supporting aggressive monetary easing and fiscal spending, will also unveil her policy agenda at 2.30 pm on Friday in Tokyo. This comes a day after formally declaring her intention to run for the leadership of the ruling Liberal Democratic Party.
US Treasury Secretary Scott Bessent has said that the BOJ is falling behind the curve in addressing inflation, in a rare admonishment of policy decisions by a foreign central bank. BOJ governor Kazuo Ueda also said last month that he expects a tight labour market to keep upward pressure on wages in remarks at the Fed’s annual symposium in Jackson Hole, Wyoming. BLOOMBERG
