The 10Y JGB yield retreated to 0.7% this week, primarily attributed to external factors. Foreign outflows from Japan's bond market have eased due to the recent rapid drop in UST yields and the narrowing of negative JGB-UST yield differentials. Recent data indicates a shift, with net foreign investment in the Japan bond market turning into a modest inflow of JPY 218bn during the first two weeks of November, in contrast to the JPY 2.3tn outflows in October.
Domestic factors suggest a potential rebound in JGB yield towards 1%. The Bank of Japan has increased the flexibility of yield curve control since the October meeting, considering 1% as a reference rate in market operations and signaling a willingness to allow the 10Y JGB yield to slightly exceed 1%. Meanwhile, inflation figures in Japan are expected to remain elevated in the near term. Tokyo's figures already revealed a 0.5 ppt rebound in October CPI, reaching 3.3% YoY. National CPI figures for October, set to be released tomorrow, have the potential to hit 3.5% YoY.
Prime Minister Kishida's government is pushing for additional fiscal stimulus measures to bolster the economy, indicating a further expansion in JGB supply. A JPY 17tn stimulus package, approved earlier this month, features one-time cuts in income and residential taxes, cash payments to low-income households, and extended energy price subsidies. This package will be funded in part by a JPY 13.1tn supplementary budget, necessitating the issuance of JPY 8.9tn in new bonds. This brings the total value of government bonds issued in FY2023 to JPY 44.5tn, a 25% increase over the initial budget.
The JGB market is predominantly influenced by the Bank of Japan and domestic private investors, with foreign investors accounting for only 7% of total JGB holdings. Monitoring domestic factors, including BOJ policy, inflation dynamics, and JGB supply, will be crucial in predicting future movements in JGB yields.
Ma Tieying 馬鐵英, CFA
Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
[email protected]
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