Synopsis:

Credit Agricole discusses the macroeconomic factors influencing the fair value of Japan's 10-year government bond (JGB) yield. As the Bank of Japan (BoJ) moves towards resuming rate hikes and reducing its accommodative monetary policy, the macro fair value of the 10Y JGB yield is expected to rise gradually from 0.9% to around 1.5% by Q4 2025.

Key Points:

• Current Macro Fair Value:

  • The current macro fair value of the 10Y JGB yield is estimated at around 0.9%.
  • This estimate is based on factors such as Japan’s net domestic fund demand, the BoJ policy rate, BoJ purchases of long-term JGBs, the 10Y US Treasury yield, and an accommodative monetary policy dummy.

• Projected Increase in Yield:

  • If financial markets stabilize and the BoJ proceeds with rate hikes, the accommodative monetary policy dummy could decline from 0.75 to 0.50.
  • This change, along with the removal of the negative interest rate policy, is expected to increase the macro fair value of the 10Y JGB yield to around 1.0%.

• Long-Term Outlook:

  • As the US economy enters a cyclical recovery phase in H2 2025, and US Treasury yields stabilize, the BoJ is expected to continue reducing JGB purchases and proceed with rate hikes.
  • By Q4 2025, the accommodative monetary policy dummy is expected to disappear, and the BoJ may raise policy rates to 0.5%.
  • These factors would push the macro fair value of the 10Y JGB yield to around 1.5%.

Conclusion:

Credit Agricole forecasts a gradual rise in the macro fair value of Japan's 10Y JGB yield as the BoJ transitions towards a less accommodative monetary policy and implements rate hikes. The yield is expected to increase from 0.9% to around 1.5% by the end of 2025, reflecting the broader shifts in Japan's monetary policy and economic conditions.