MUFG’s Derek Halpenny highlights that January’s sharp rise in super-long JGB yields attracted strong foreign demand, helping cap yields and easing market instability concerns. With the IMF urging fiscal discipline and Bank of Japan policy normalization, MUFG expects a BoJ rate hike on 28 April, which, alongside renewed domestic demand, has helped stabilise the Japanese Yen.

Foreign JGB demand and BoJ normalization

"Judging from price action, domestic buyers may have returned to the market with the government doing a good job in messaging to the market their intention to tread carefully and act responsibly in fiscal policy plans ahead. From that closing high the 30-year yield is now down 54bps easing concerns over financial market instability."

"While the flow data indicates still strong appetite for JGBs at these yield levels, risks remain and the IMF last week called on Japan to adopt a credible medium-term fiscal plan."

"The IMF advised that the policies supporting vulnerable households and companies should be “budget-neutral, targeted and temporary”."

"That’s becoming much more likely in our view and we see the BoJ hiking at the meeting on 28th April. Market pricing implies about a 70% probability of a hike then and the increased prospects of a sooner hike have helped stabilise the yen which has been another factor helping bring longer-term yields lower."

"BoJ board member Takata will speak this week – on Thursday. Takata is one of the more hawkish members of the policy board so will likely endorse market pricing."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)