10yr JGB Yield Heading Higher
For 10yr JGB yields, the BOJ is preparing the way for yield curve control to be abandoned in H1 2024, with the shift to a 1% 10yr JGB reference rate.
However, the 1 step in Q1 will likely be a rise in the BOJ policy rate (-0.1%) by 10bps to zero. The BOJ inflation forecasts will then likely drive them to 25bps of hikes in Q2, which has been done in 2000 and 2006 with less inflation pressure than currently. For 10yr yields, the end of YCC can mean pre 2013 type behavior in JGB yields (Figure 6). We see end investors being reluctant until 10yr yields move towards 1.50-2.00% and we forecast 1.60% end 2024 (here). BOJ bond buying will be designed to slow the pace of adjustment rather than protest at the level of 10yr JGB yields – though 2% 10yr JGB yields would likely be too much for the BOJ in the next 2 years.
We then see no further change in the BOJ policy rate from H2 2024 onwards. , as we see CPI inflation slowing below 2% (wage inflation not rising as much as expected in 2024 and PPI slowdown feeding through) and then to 1% in 2025. This will also cap 10yr JGB yields and we see 1.50% for end 2025.
Figure 1: 10yr JGB and BOJ Policy Rate (%)
Source: Datastream/Continuum Economics