- In May, Japan's Corporate Goods Price Index (CGPI) rose significantly by 6.3% year-on-year, exceeding expectations. The effect of passing on energy costs due to Middle East conflicts continues to manifest, reigniting inflationary pressures on the production side and pushing up Japanese government bond yields across the board.
- The 30-year super-long government bonds issued by Japan's Ministry of Finance faced a noticeable cooling in market demand, with the bid-to-cover ratio falling to a near one-year low of 2.94 times, highlighting the cautious sentiment among institutional investors ahead of next week's central bank policy meeting.
- A recent Reuters survey of core economists indicates that the Bank of Japan may cumulatively raise interest rates to 1.25% within the year. Curbing the sharp depreciation of the yen and preventing long-term interest rates from rising too quickly have become urgent policy priorities for Japan's monetary authorities.
Inflationary Pressures Exceed Expectations, Driving Up Bond Yields
The latest macroeconomic data released on Wednesday shows that Japan's CGPI in May rose by 6.3% compared to the same period last year, significantly exceeding previous market expectations. The unexpected rebound in supply chain price pressures is mainly driven by the rising international energy costs and import prices due to ongoing geopolitical conflicts in the Middle East. As upstream production costs rapidly transmit through various economic sectors, concerns about sustained inflation in Japan have noticeably intensified. Stimulated by this fundamental economic data, the Japanese government bond market faced marginal selling pressure, with yields across different maturities rising to varying degrees, and the long-term and super-long yield curves steepening.
Cooling Demand for 30-Year New Bonds Reflects Market Risk Aversion
Amid bond market volatility triggered by inflationary pressures, Japan's Ministry of Finance (MOF) publicly issued approximately 600 billion yen, equivalent to about 3.74 billion USD, in 30-year super-long government bonds on Wednesday. However, due to increasing divergence in market expectations for future long-term bond interest rates, institutional investors exhibited extreme caution in this auction. Official statistics show that the bid-to-cover ratio for this 30-year new bond auction fell to 2.94 times, marking the lowest demand level in the past year. The rapid decline in auction demand fully reflects the marginal appeal of long-term assets being pressured and weakened due to the re-evaluation of risk premiums during a sensitive window of high uncertainty regarding future monetary policy directions.
Market Expectations for Bank of Japan Rate Hikes Significantly Strengthened
As multiple macro indicators show persistent inflationary signs, global investors are now fully focused on the Bank of Japan's (BOJ) regular monetary policy meeting scheduled for next week. According to the latest quarterly survey by Reuters targeting mainstream economists, market expectations for the monetary authorities' policy tightening roadmap have significantly advanced. Most surveyed experts anticipate that the Bank of Japan may raise benchmark interest rates twice, once in this month's meeting and again in the fourth quarter, bringing Japan's benchmark rate to 1.25% by the end of 2026. If this tightening pace materializes in the future, it would mean Japan will completely bid farewell to its long-standing ultra-low interest rate macro environment.
Policy Priorities Focus on Stabilizing Exchange Rates and Long-Term Interest Rates
Regarding the current linkage between bond and foreign exchange market asset prices, Ataru Okumura, a senior rate strategist at SMBC Nikko Securities, pointed out in a newly released analysis report that curbing the sharp depreciation of the yen and restraining the rapid rise of long-term interest rates have become priority issues jointly faced by the Bank of Japan and the Japanese government at this stage. Therefore, the core trading theme in Japan's government bond market is expected to focus entirely on the strength of signals regarding the Bank of Japan's future intentions and pace of rate hikes. If next week's official statement reveals a more hawkish stance than expected, Japanese bond yields may still have room for further upward movement in the short term, leading to continued revaluation of bond prices.
Rumors of Reducing Bond Purchases Trigger Expectation Divergence
It is noteworthy that on the previous trading day, mainstream overseas financial media reported that the Bank of Japan is considering maintaining its current asset purchase scale after the end of the next fiscal year, potentially delaying the process of reducing its balance sheet. This policy rumor temporarily supported Japanese government bond prices on Tuesday and somewhat eased market selling pressure. However, Wednesday's unexpectedly high price data and relatively weak long-term new bond auction results quickly reversed the previous bullish sentiment. Several market analysts pointed out that if core inflation data continues to rebound in the future, the Bank of Japan will face a more severe balancing test between maintaining the current bond purchase scale to stabilize the market and raising interest rates to curb inflation.
