Bank of Japan, Japanese government bonds and yen

While the Bank of Japan (BoJ) is likely to normalise its monetary policy, the pace of normalisation could be very slow in an environment in which the inflation outlook is still highly uncertain. The removal of the yield curve control could only occur in the second half of 2024 after the bank concludes its comprehensive review of monetary policy, while an exit from the negative policy rate may happen months later.

The Bank of Japan’s recent adjustment to its yield curve control sent the yield on 10-year Japanese government bonds (JGBs) higher to 0.74% (on 21 September) and we expect it to continue its ascent towards 0.8% by year-end. As domestic bond yields become more attractive and the cost of hedging foreign currency investments remains elevated, it is plausible that Japanese investors will continue to withdraw from foreign bonds. This could put some upward pressure on some global bond yields.

The yen is highly sensitive to interest rate differentials. While unsupportive in past quarters, we see scope for a change as major central banks are likely close to being done with their tightening cycles, whereas the Bank of Japan is likely to further normalise its monetary policy.