- The 10-year Japanese government bond yield (JP10YTN=JBTC) fell by 2 basis points to 2.4% on Monday, moving away from the high of 2.49% reached last week. The market is taking a defensive stance ahead of the release of the Bank of Japan's quarterly inflation expectations survey.
- There has been a significant reassessment of the pricing for a rate hike at the Bank of Japan's (BOJ) April meeting in the interest rate swap market. The expected probability has plummeted from around 60% at the beginning of the month to 18%, reflecting the marginal disturbance of imported inflation pressures on the policy tightening pace.
- The yield of the 2-year Japanese government bond (JP2YTN=JBTC), which is more sensitive to policy changes, remained steady at 1.36%, indicating relatively stable short-end liquidity expectations as the market digests cautious comments from Bank of Japan Governor Kazuo Ueda regarding negative supply shocks.
Marginal Movement of the Yield Curve
Today's trading session in the Japanese sovereign debt market exhibited a noticeable recovery trend. Regarding long-term rates, the 10-year Japanese government bond yield fell back to the 2.4% mark, while the 5-year Japanese government bond (JP5YTN=JBTC) yield also decreased by 1 basis point to 1.825%, temporarily pausing its upward trend towards the previous historical high of 1.9%. This localized flattening and downward shift of the yield curve is mainly constrained by caution ahead of macroeconomic data releases. Institutional investors have generally opted to reduce short positions before confirming the latest inflation expectations benchmark. If the central bank's inflation report shows weakened momentum of cost transfer from the corporate sector to consumers, the downward space for long-term yields may further expand.
Rapid Cooling of Rate Hike Expectations
Pricing changes in the interest rate derivatives market form the core clue of current Japanese bond trading. The rate hike probability indicated by Tokyo Short-Term Interest Rate Swaps has sharply contracted from 60% to 18%, signaling that the market's expectation for the Bank of Japan's monetary policy normalization path is undergoing a phase of revision. Since the central bank raised the benchmark rate to 0.75% last December, the market has been inclined towards a narrative of continuous tightening. However, the rise in energy import costs has placed a higher data requirement on monetary authorities when assessing actual economic demand. SMBC Nikko Securities strategists' assessments indicate that postponing the April rate hike has become the mainstream baseline scenario among institutions.
Policy Considerations of Negative Supply Shocks
The rising geopolitical tensions in the Middle East are directly exerting a negative supply shock on domestic prices in Japan through commodity price channels. This externally cost-driven price increase fundamentally differs from the benign inflation cycle pursued by the central bank, which is driven by domestic demand and wage growth. Monetary policy usually faces dilemmas when addressing such cost-push inflation. A forced rate hike at this time could further suppress the fragile recovery momentum in domestic consumption. Hence, the upcoming quarterly inflation expectations report will serve as a crucial anchor for judging whether the medium- to long-term inflation center has substantially moved upward, with its data performance directly determining the timing of the next rate hike window.
