Confirmation of the effects of Fed rate hikes suggests that the upswing in Japan's 10-year JGB yield may be coming to an end. The risk of sharp rate hikes by the BOJ has receded, and attention is turning to the outlook for interest rates.
The scale of the impact that Fed rate hikes have on financial markets has been reaffirmed. US interest rates rose sharply and CDS spreads widened from September onward, but financial conditions also eased at times during the anticipated process of resuming rate hikes, while the actual rate hike triggered a sudden tightening in conditions.
There is no indication that the outlook for a rate hike in December is receding, and long-term US yields have retraced part of their move since September. The possibility that the Fed will be forced to raise rates further is not insignificant, but the current degree of financial tightening is considered to have only a limited effect on restraining economic activity and prices.
The effects of Fed rate hikes could also affect yen interest rates, but the view is that the risk of a sharp depreciation of the yen is limited at the current degree of tightening. There are concerns that, if additional rate hikes proceed, the BOJ could come under pressure to respond with rate hikes of its own.
Japan's inflation expectations are stable, and upstream price pressures are also expected to ease. Inflation expectations in the survey of people's views on daily life declined slightly from the previous period, and downward pressure on rice prices is also expected. It has also been suggested that fiscal policy developments, in conjunction with France's fiscal turmoil, could prompt Japan to make fiscal decisions.
Overall, the view is that conditions are gradually taking shape for a more bullish stance in the short-, medium- and long-term yen bond markets, suggesting that the 10-year JGB yield may be approaching the end of its uptrend.