The Bank of Japan maintains a cautious tone, and Mizuho warns the risk of missing the interest rate hike window

The Zhitong Finance App learned that Mizuho Securities released a report on the Bank of Japan's policy on June 9, indicating that the Bank of Japan's position has not changed since the May monetary policy meeting. Governor Kazuo Ueda reiterated that there is no intention to forcibly raise interest rates. The debt purchase reduction plan continues, but adjustments are possible after April 2026. On the political front, the Democratic Progressive Party's approval rating declined, the Liberal Democratic Party did not benefit significantly, and there is uncertainty about the political structure and scale of fiscal stimulus after the election.

Policy tone: there have been no significant changes in positions since May, continuing the “wait-and-see” tone

The bank pointed out that the Bank of Japan's position has not been significantly adjusted since the May 2025 monetary policy meeting (MPM), and the core continues the “wait-and-see” tone. Governor Kazuo Ueda emphasized many times during hearings and public speeches on June 3 that “there is no intention to forcibly raise interest rates” and that “there is no need to rush to adjust interest rates”, clearly denies market speculation that “early interest rate hikes to make room for future interest rate cuts.”

By curbing the market's excessive expectations of policy changes, this statement suppresses expectations for an upward trend in yen interest rates. Although the US announced a reduction in tariffs on China, the central bank believes that the boosting effect of improving the external trade environment on the Japanese economy has not been fully demonstrated in inflation and employment data, and currently it is still necessary to wait for “the sustainability of economic and price improvements to be verified” before considering policy normalization.

In terms of debt purchase plans, the market is divided on whether to stop reducing debt purchases after April 2026: some investors expect the central bank to slow down the pace of contraction (such as “considering reducing the pace of reduction” mentioned in the Reuters June 4 report), but Ueda stated that “most market participants support continued reduction” and “many people think it is appropriate for the central bank to continue reducing debt purchases from April 2026.” These remarks may indicate that the probability of a policy shift in the short term is low. The central bank currently does not consider stopping reducing debt purchases as one of the main options.

Mizuho previously predicted that the Bank of Japan may eventually reduce the monthly debt purchase scale to 1-2 trillion yen. Currently, the most likely outcome is that the central bank will try to curb this direction by continuing to drastically reduce the size of debt purchases (in Japanese yen) while limiting its long-term (interest rate risk) exposure to the market by not further reducing the amount of purchases of ultra-long-term Japanese treasury bonds (Japanese treasury bonds).

Political game: Liberal Democratic Party support is weak, fiscal policy uncertainty is high

Mizuho pointed out that although the Democratic Progressive Party (DPP) seems to be weakening, the Liberal Democratic Party (LDP)'s public approval rating has not rebounded accordingly, and it is expected that the political power structure and scale of fiscal stimulus will continue to remain uncertain after the election.

The stalemate in Japan's political landscape has exacerbated fluctuations in the bond market. The Democratic Progressive Party (DPP) approval rating declined to 6.8% due to the scandal and a series of inappropriate remarks. The Constitutional Democratic Party (CDP) rose to 8.4%, while the Liberal Democratic Party (LDP) only rose slightly to 24.3%. 42.2% of respondents said they “don't support any political party,” highlighting the crisis of voters' trust in mainstream political parties. Mizuho believes the election results may become more uncertain.

The bank believes that if the market expects the Ishiwari Shigeru administration to continue and concerns about expansionary fiscal policies decrease, the Liberal Democratic Party's approval rating may boost Japan's treasury bonds (especially ultra-long-term treasury bonds). However, at least for now, it is expected that the political power structure and corresponding fiscal policy will continue to be uncertain after the election, which may put pressure on Japan's treasury bonds.

Although the probability of simultaneous elections for both houses of the Senate and the House of Representatives (“double election”) is low (Mizuho assessed as a “low probability event”), the bank believes that this will lead to increased uncertainty in seat allocation and power structure after the election, and the Japanese treasury bond yield curve may first be reacted by steeping.

Mizuho pointed out that political uncertainty has led to a rise in the volatility of the ultra-long-term sector (30 years and 40 years) of Japanese treasury bonds. The 30-year Japanese treasury bond yield fluctuated 12 bps in the first two weeks of June, reflecting investors' cautious attitude towards policy prospects.

Bond market outlook: Continued short-term fluctuations in ultra-long-term treasury bonds put pressure on the medium-term full-term yield curve

Looking at the short term, Mizuho believes that in the Japanese treasury bond market, the Ministry of Finance's early reduction in the scale of issuing ultra-long-term Japanese treasury bonds may flatten the yield curve. Given the significant uncertainty about whether the Ministry of Finance will reduce issuance volume and the extent of the reduction, the bank expects ultra-long-term Japanese treasury bond yields to continue to fluctuate in the short term.

However, the bank believes that if the market agrees that supply may be drastically reduced, the yield on ultra-long-term Japanese treasury bonds may stabilize. Since the bank believes that the market's ability to absorb expectations of further interest rate hikes by the Bank of Japan is limited until investors have a clearer understanding of the results of the US-Japan trade negotiations, the medium-term treasury bond yield trend is expected to be relatively stable.

In the medium term, the bank believes that in the fall and beyond, the inflation rate may fall to 2% or less due to the following two factors: (1) the recent strengthening of the yen; (2) as potential inflation falls, the base effect of food prices weakens. In summary, in this environment, it will become increasingly difficult for the Bank of Japan to continue to raise interest rates. Although the inflation rate is likely to remain relatively high until mid-2025, the central bank may be reluctant to hastily raise interest rates while still trying to assess the impact of US tariffs. Ultimately, the bank believes that the Bank of Japan will miss the best time to raise interest rates. The bank's benchmark scenario is that the policy interest rate remains unchanged for the time being.

The bank believes that as market speculation about the end of the current interest rate hike cycle heats up, it is expected that the Japanese treasury bond yield curve will face downward pressure throughout its term. Furthermore, the sharp steep yield curve in April may also experience reversal pressure, driving the overall curve to a broad “steep bullish” pattern.

The bank believes that in the US, the Federal Reserve may be torn between rising inflation and economic weakening, but it is expected that since (1) the main impact of tariffs on inflation will be one-off, and (2) the Trump administration would prefer to see interest rates fall, the Fed will pay more attention to economic weakening issues and restart interest rate cuts in the fall and beyond.