Amundi predicts yields on long-maturity Japanese government debt could hit fresh record highs in the coming months on concern the country’s new prime minister will boost borrowing.
The 30-year JGB yield could go above 3.5%, almost 40 basis points higher than where it was trading on Wednesday, according to Claire Huang, senior EM macro strategist at the Amundi Investment Institute, the research arm of Europe’s largest asset manager.
Sanae Takaichi, voted the country’s prime minister on Tuesday after pulling together a new coalition government, has long advocated for government spending to boost Japan’s economic growth and is a proponent of low interest rates.
“There’s concern about fiscal discipline, especially in the medium term,” said Huang, who specializes in Asian countries. “I wouldn’t say that it’s a very rosy picture for the super-long end, or that its selloff has completely ended.”
Political and fiscal uncertainty are keeping the nation’s yields elevated. The 30-year JGB yield hit 3.345% earlier this month, the highest since the debt debuted in 1999. Japanese government notes are the worst performers for the year.
Huang predicted investors would only return to longer notes when Takaichi’s policies become clearer and if she can get a handle on high living costs. While she has ordered a fresh package of economic measures aimed at easing the burden of inflation on households and companies, Takaichi did not specify the size of the package or indicate whether additional bond issuance would be needed to finance it.
While slowing inflation would curb the rise in extra-long yields, Huang said there’s a risk the 10-year rate could reach 1.8%. That could happen as the Bank of Japan gradually reduces its massive stockpile of the maturity, she said, amassed as part of its earlier yield curve control measures.
Commenting on the yen — which has tumbled about 2.5% this month on concern Takaichi may discourage the BOJ from raising interest rates — Huang predicted the weaker currency would actually add to the case for a rate hike because it increases inflationary pressures by making imports costlier.
“Assuming a scenario that dollar-yen pair breaks above 155 and trades in a range of 155-160, the BOJ is very likely to hike,” she said.
That level is already in sight after the Japanese currency tumbled to its weakest in eight months at around 153 per dollar earlier in October. The yen was trading at 151.84 at 7:10 a.m. in Tokyo on Thursday.
A decision to hike this year “really comes down to the yen,” Huang said.
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