Source: Wall Street News Author: Chang Jiayi
Barclays maintains its forecast that the Bank of Japan will raise interest rates in July and believes that it will not notify interest rate hikes in advance. However, in reducing the purchase of Japanese government bonds, the Bank of Japan may communicate with the market in advance to digest the impact of the downgrade of government bond purchases, and avoid volatility when the interest rate is raised in July.
On Friday, the Bank of Japan announced that it would keep the benchmark interest rate unchanged at 0-0.1%, and the committee unanimously agreed on the interest rate resolution of 0-9, which is in line with market expectations. However, Bank of Japan Governor Haruhiko Kuroda also said that the next meeting in July will announce a reduction in the scale of bond purchases, which is actually delaying the process of monetary policy normalization.
What will the Bank of Japan do next? Barclays Bank pointed out that the language of the Bank of Japan still maintains a hawkish tone, recognizing the recovery of the Japanese economy. The bank insists that the Bank of Japan’s basic assumption of raising interest rates in July, and the policy risk of the Bank of Japan’s subsequent actions is to announce a reduction in bond purchases and raise interest rates at the same time. The next stage should focus on the "opinion summary" released on June 24th.
Long-term Japanese bond yields will rise
At the June meeting, as expected by the market, the Bank of Japan kept the benchmark interest rate unchanged. However, in the statement, the Bank of Japan stated that the committee voted 8:1 to reduce the purchase of government bonds in the future.
Barclays Bank pointed out that Bank of Japan Governor Haruhiko Kuroda has repeatedly stated that the Bank of Japan is best able to slow down the speed of purchasing Japanese government bonds in the normalization process. Although the Bank of Japan has postponed decisions on related content, it has stated that it will "collect the opinions of market participants and decide a detailed reduction plan for the next one to two years at the next monetary policy meeting (July 30-31)".
Japanese government bond yields are influenced by various factors, such as US yields, redemption rates, expectations of the Bank of Japan further raising interest rates, and trends in Japanese government bond purchases. Each factor has a different impact on yields.
Barclays Bank predicts that by 2026:
The increase in the yields of 2-year and 5-year Japanese bonds is greater than that of 10-year and 30-year Japanese bonds. The former is greatly affected by policy rate hikes, and the latter is greatly affected by the decrease in Japanese government bond purchases. This indicates that the yield curve will tend to flatten.
The bank calculates that according to different terminal rate and government bond purchase assumptions, the yield on 10-year government bonds will be in the range of 1.09% to 1.43% at the end of 2026.
In addition, the Bank of Japan also stated that the current Japanese economy has moderately recovered, although some regions have shown some weakness. The wording of the specific content has also remained largely unchanged.
Barclays emphasizes that since April, Japanese economic data has basically met expectations, and Kuroda hopes to confirm some information before the outlook report in July. If conditions are met, raising interest rates at the policy meeting in July is "naturally possible."
Secondly, regarding the issue of the depreciation of the yen, he stated at the press conference of the April meeting that the depreciation of the yen has little impact on basic inflation, but there are signs of a rebound in import prices. Kuroda hopes to see a more stable benign cycle between wages and inflation.
The bank also believes that the Bank of Japan will not notify in advance when raising interest rates. However, in reducing the purchase of Japanese government bonds, the Bank of Japan may communicate with the market in advance to digest the impact of the downgrade of government bond purchases, and avoid volatility when the interest rate is raised in July.
On June 21, Japan will release national CPI data for May, and on June 24, the Bank of Japan will release a summary of the monetary policy meeting opinions. The release of this information can further evaluate the possibility of a rate hike in July.
June 21st, Japan will release national CPI data for May, and June 24th, the Bank of Japan will release the Minutes of the Monetary Policy Meeting. The release of this information can further evaluate the possibility of a rate hike in July.
Editor/Lambor