Short- and medium-dated JGB yields, which move inversely to prices, were flat to slightly lower following their rise to the highest levels since 2008 earlier this week. The pullback followed growing expectations that the BOJ could resume rate hikes as early as next month, after a more hawkish shift from officials at the policy meeting last week.
Market-implied odds of a 25-basis-point rate hike at the October 30 meeting stand at 56%, rising to 64% by the year-end, according to LSEG data.
Japanese government bonds saw limited trading as investors prepared for the weekend. Attention focused on the Bank of Japan’s potential policy tightening and the selection of the next prime minister. Short and medium-term bond yields were slightly lower after reaching highs earlier in the week. Expectations grew for a possible rate hike by the BOJ next month.
The 10-year JGB yield was flat at 1.645%, down from as high as 1.665% on Monday. The five-year yield declined 1 basis point (bp) to 1.22%, after touching 1.235% at the start of the week.
The two-year JGB had yet to trade on the day, as of 0513 GMT.
Meanwhile, the 20-year yield rose 1.5 bps to 2.61% and the 30-year yield added 0.5 bp to 3.135%, following two sessions of declines. The 30-year yield has declined steadily from a record high of 3.285% reached earlier this month, when investors shunned the longest-dated debt amid worries about Japan’s finances. Fiscally hawkish Prime Minister Shigeru Ishiba announced plans to step down to take responsibility for a drubbing in upper house elections, and one of the main contenders to replace him, Sanae Takaichi, is a known fiscal and monetary dove.
However, Takaichi has toned down her rhetoric as she goes head to head with Farm Minister Shinjiro Koizumi, generally viewed as the continuity candidate on fiscal policy.
Given this, “even if it starts to look increasingly likely that she (Takaichi) will come out on top, the so-called Takaichi trade (of selling longer-term debt) is unlikely to have a significant medium-term impact,” said Yusuke Matsuo, senior market economist at Mizuho Securities.
“Nevertheless, it is worth noting that her underlying reference for expansionary fiscal policy combined with accommodative monetary policy – a reflationary stance – is unchanged.”
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