Japanese government bond yields have reached their highest level in almost a decade, as investors anticipate key decisions from the US Federal Reserve and the Bank of Japan (BOJ). The benchmark 10-year yield rose 0.5 basis point (bp) to 0.720% on Wednesday, a level it has hit three times in the past six trading sessions. This is the highest it's been since January 2014.
The rise in yields comes after BOJ Governor Kazuo Ueda suggested in an interview with the Yomiuri newspaper earlier this month that the central bank’s negative interest rate policy could end within this year. This has led to speculation of a potential rate hike into early 2024, despite the absence of fresh economic projections at the upcoming meeting.
Japanese bond investors are cautious of a possible hawkish shift in the BOJ’s tone when it concludes a two-day meeting on Friday. Shoki Omori, chief Japan desk strategist at Mizuho Securities, believes that the BOJ will maintain its flexibility by keeping its options open.
Meanwhile, traders expect the Fed to leave rates unchanged later on Wednesday but lay 40% odds on a further quarter-point hike this year, according to CME FedWatch tool. Japanese yields also faced upward pressure on Wednesday due to an overnight rise in equivalent US Treasury yields to 16-year highs.
The BOJ is set to hold their monetary meeting across September 21 – 22, 2023, with wide consensus for its short-term interest rate target to be kept unchanged at -0.1% and that for the 10-year bond yield around 0%. Current market rate expectations are leaning towards a 55% probability that the BOJ may end its negative interest rate in the first quarter of 2024.
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