FxWirePro: JGBs 10-year yield to hover around 0.05 pct; rising 10-year UST yield possess upside risk

The Japanese government bonds traded nearly flat on Wednesday ahead of the Bank of Japan (BoJ) monetary policy decision scheduled for Friday. Looking at the current economic condition, we expect that the yield on 10-year JGB to hover around 0.05 percent in the near-term as the central bank is anticipated to keep its ultra-easing stance intact this year with yield curve control (YCC).

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, traded flat at 0.055 percent, the yield on the long-term 30-year note remained steady at 0.742 percent and the yield on short-term 2-year hovers around -0.133 percent by 03:10 GMT.

We do not expect any change in policy or communications on Friday from the BoJ. Although core inflation (ex. fresh food and energy) is trending upward, it was just 0.5 percent in March, far below the BoJ’s 2 percent objective. Moreover, the apparent stall in GDP growth in 1Q will give some pause. Kuroda is likely to maintain an optimistic tone, though the updated forecast is likely to concede that inflation will not reach 2 percent until FY2020, rather than FY2019.

Markets already expect this change and we maintain our call for a 25 basis points hike of the 10-year yield target in December 2018. Risks to this call include further yen appreciation and the negative effect this would have on the inflation outlook.

The Bank of Japan in its daily open market operation held today bought JPY450 billion of to 5-10 year JGBs, JPY190 billion worth of bonds of 10-25 years of maturity and JPY70 billion worth of bonds of over 25 years of maturity.

Meanwhile, the Nikkei 225 index traded 0.57 percent lower at 22,151.50 by 03:15 GMT, while at 03:00GMT, the FxWirePro's Hourly JPY Strength Index remained neutral at -66.71 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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