Recent Rise in Yen Rates Defies Clean Explanation

Mizuho argues that the recent spike in Japanese JGB yields to 2.8% is driven more by a seasonal supply/demand 'vicious cycle' in May than by macro factors. They expect the rise to pause as the current 'auction rush' concludes.

Key Takeaways

• 1.The recent surge in yen rates, with the 10y JGB briefly exceeding 2.8%, cannot be fully explained by macro factors like Iran war-linked inflation or fiscal expansion concerns.
• 2.A seasonal supply/demand 'vicious cycle' in May, exacerbated by a rush of auctions, likely amplified yield movements more than fundamental macroeconomic shifts.
• 3.Japanese forward OIS rates already price in a high inflation outlook, reaching parity with Eurozone levels and narrowing gaps with US rates despite lower potential growth.

Table of Contents

• (1) Recent rise in yen rates defies clean explanation
• IS (WAS) MARKET NOT PRICING IN PROLONGED INFLATION?
• FISCAL DEVELOPMENTS: SUPPLEMENTARY BUDGET UNLIKELY TO RESULT IN HIGHER CALENDAR-BASE JGB ISSUANCE
• RISE IN YEN RATES DEFIES CLEAN EXPLANATION
• DEVELOPMENTS THIS WEEK AND IMPLICATIONS FOR RATES OUTLOOK
• SHORT-TERM OUTLOOK (ONE WEEK – ONE MONTH)
• MEDIUM-TERM OUTLOOK (SEVERAL MONTHS – ONE YEAR)
• Risk scenarios
• (2) Envisaged timetable for BOJ JGB-buying operations
• (3) Yen rates relative value and investment strategies

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