Swap market pricing shows traders put the probability of a BOJ rate hike at
about 75% for June and 92% for July. Michio Saito of Nomura Capital Markets
Research Institute said the Iran war could push oil higher and weigh on
energy-importing Japan, making the BOJ more cautious about tightening. Saito,
who served until 2023 as a senior bond policy official at Japan’s Ministry of
Finance, said, “The timing for a rate hike has actually arrived, or at least is
very close… but I am not sure the BOJ policy board’s path to a hike will be
smooth.” He added that JGB yields may have risen excessively amid market
concerns about inflation and a possible expansion of government fiscal spending.
Japan’s 10-year government bond yield briefly rose to 2.8% on May 18, its
highest since 1996; Saito said that level is currently too high relative to
other parts of the JGB curve and that a reasonable range for the 10-year is
about 2.0%–2.5%. He warned that if the Strait of Hormuz remains closed, market
worries over oil and LNG supply would intensify and, for Japan, “the risk is no
longer just higher prices; economic activity itself could stall.”
