The Japanese bond market is expected to experience high volatility this week due to a combination of political events and economic signals from the central bank.
Political Turbulence and Its Impact on the Market
Long-term yields on Japanese government bonds are hovering near record highs after Prime Minister Shigeru Ishiba’s coalition lost control of the upper house of parliament.
This loss has provided an uplift to opposition lawmakers who support increasing borrowing to fund tax cuts. Such discussions are making bond investors nervous.
Long-term JGBs remain stuck at high yields as no one wants to be caught off guard by sudden political or policy changes.
Bank of Japan Decision and Its Significance
The Bank of Japan will meet on Thursday, and while no immediate rate hike is expected, the signed trade agreement with the United States has bolstered the central bank's confidence in Japan's growth outlook. Traders appear to be betting on a rate hike before the year's end.
Everyone will be watching Governor Kazuo Ueda’s press conference after the meeting. There is anticipation regarding whether the BOJ is finally ready to start backing away from its ultra-loose policies, which would result in less bond buying by the central bank and put pressure on the Finance Ministry to maintain stability.
U.S. Risks and Their Impact on the Japanese Economy
While Japan is trying to sort things out domestically, the United States adds more risk. The Federal Reserve is expected to announce its rate decision on Wednesday, with most analysts expecting a hold, although tensions are rising within the Board of Governors.
If doubts emerge regarding the dollar’s role as a global reserve currency, it could lead to a sharp spike in long-term U.S. Treasury yields, negatively impacting Japan's bond market.
This week presents a period of significant instability for the Japanese bond market, influenced by both internal political factors and external economic events. Monitoring the actions of the government and central bank will be key to understanding the future of the bond market.
