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

According to the Zhitong Finance APP, Mizuho Securities released a report on June 9 regarding the Bank of Japan's policy, stating that the Bank of Japan's stance has not changed since the monetary policy meeting in May. Governor Kazuo Ueda reiterated that there is no intention to force a rate hike, and the bond purchase reduction plan will continue, but adjustments may be possible after April 2026. Politically, the Democratic Party's support has declined, and the Liberal Democratic Party has not significantly benefited, leading to uncertainties regarding the political structure and scale of fiscal stimulus after the elections.

Policy Tone: No Significant Changes Since May, Continuing "Cautious Wait-and-See" Tone

The report pointed out that the Bank of Japan has not made significant adjustments to its stance since the monetary policy meeting (MPM) in May 2025, maintaining a core "cautious wait-and-see" tone. Governor Kazuo Ueda emphasized multiple times during a hearing and public speech on June 3 that there is "no intention to force a rate hike" and "there is no need to rush to adjust interest rates," clearly denying market speculation about "raising rates in advance to create room for future rate cuts."

This statement helps to suppress excessive market expectations for a policy shift and lowers expectations for an increase in yen interest rates. Although the United States announced a reduction in tariffs on China, the central bank believes that the improvement in the external trade environment has not yet been fully reflected in inflation and employment data, and it is still necessary to wait for "the sustainability of economic and price improvements to be verified" before considering policy normalization.

Regarding the bond purchase plan, there are differences in the market about whether to stop reducing bond purchases after April 2026: some investors expect the central bank may slow down the pace of reduction (as mentioned in a Reuters report on June 4 about "considering lowering the reduction pace"), but Ueda stated that "most market participants support continuing the reduction" and "many believe it is appropriate for the central bank to continue reducing bond purchases from April 2026," suggesting that the probability of a policy shift in the short term is low, and the central bank does not currently view stopping the reduction of bond purchases as one of its main options.

Mizuho previously predicted that the Bank of Japan might ultimately reduce its monthly bond purchase scale to 1-2 trillion yen, and it currently believes the most likely outcome is that the central bank will attempt to suppress this direction by continuing to significantly reduce the bond purchase scale (in yen terms), while also limiting its exposure to duration (interest rate risk) by not further reducing the purchase amount of ultra-long-term Japanese government bonds (Japanese government bonds).

Political Game: Weak Support for the LDP, High Uncertainty in Fiscal Policy

Mizuho pointed out that although the Democratic Party (DPP) seems to be losing momentum, the public support for the Liberal Democratic Party (LDP) has not correspondingly rebounded, and it is expected that the political power structure and scale of fiscal stimulus after the elections will continue to have uncertainties.

The stalemate in Japan's political landscape has intensified volatility in the bond market. The support rate for the Democratic Party (DPP) has fallen to 6.8% due to scandals and a series of inappropriate remarks, while the Constitutional Democratic Party (CDP) has risen to 8.4%, and the Liberal Democratic Party (LDP) has only slightly increased to 24.3%. 42.2% of respondents indicated "no support for any political party," highlighting a crisis of trust among voters towards mainstream political parties. Mizuho believes that the election results may become more uncertain The bank believes that if the market expects the Shinto Abe government to continue and concerns about expansionary fiscal policy decrease, the significant rise in support for the Liberal Democratic Party may boost Japanese government bonds (especially ultra-long-term bonds). However, at least for now, it is expected that the political power structure and corresponding fiscal policy after the election will continue to have uncertainties, which may put pressure on Japanese government bonds.

Although the probability of simultaneous elections for both houses of parliament ("double elections") is low (Mizuho assesses it as a "low probability event"), the bank believes this will lead to increased uncertainty in seat distribution and power structure after the election, and the yield curve of Japanese government bonds may first respond by steepening.

Mizuho pointed out that political uncertainty has led to increased volatility in the ultra-long-term segment of Japanese government bonds (30-year, 40-year), with the yield on 30-year Japanese government bonds fluctuating by 12 basis points in the first two weeks of June, reflecting investors' cautious attitude towards policy prospects.

Bond Market Outlook: Short-term Continued Volatility in Ultra-long-term Bonds, Mid-term Yield Curve Under Pressure

In the short term, Mizuho believes that in the Japanese government bond market, the Ministry of Finance's early reduction of ultra-long-term Japanese government bond issuance may push the yield curve to flatten. Given the significant uncertainty regarding whether the Ministry of Finance will reduce the issuance volume and by how much, the bank expects that the yield on ultra-long-term Japanese government bonds will continue to fluctuate in the short term.

However, the bank believes that if the market reaches a consensus that the supply volume may be significantly reduced, the yield on ultra-long-term Japanese government bonds may stabilize. Since the bank believes that the market's ability to digest expectations of further interest rate hikes by the Bank of Japan is limited until investors have a clearer understanding of the results of US-Japan trade negotiations, it expects the mid-term government bond yield trend to be relatively stable.

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

The bank believes that as market speculation about the imminent end of the current rate hike cycle intensifies, the yield curve of Japanese government bonds across all maturities is expected to face downward pressure. In addition, the significant steepening of the yield curve in April may also face reversal pressure, pushing the curve overall into a broad "bull steep" shape.

The bank believes that in the United States, the Federal Reserve may be caught between rising inflation and weakening economic conditions, but it expects that given (1) the main impact of tariffs on inflation will be one-time, and (2) the Trump administration is more eager to see interest rates decline, the Federal Reserve will pay more attention to economic weakness in the autumn and beyond, and restart rate cuts