Is the storm of Japanese government bonds not over? If the price increase exceeds expectations, the Bank of Japan is brewing another interest rate hike within the year

According to reports from media citing informed sources, officials from the Bank of Japan generally believe that the overall price increase in Japan is slightly stronger than the expectations given by central bank officials earlier this year; if global trade tensions ease, and central bank officials believe this factor may open the door for further discussions on interest rate hikes, the next rate hike could occur in the second half of this year.

Informed sources stated that at the end of next week's two-day monetary policy interest rate decision by the Bank of Japan, the central bank's benchmark interest rate is expected to remain at 0.5%, mainly because the monetary policy makers of the Bank of Japan need to continue observing the progress of global tariff negotiations, as well as the impact of U.S.-Japan trade negotiations led by the Trump administration on the economies of both the U.S. and Japan.

Currently, the concerns of interest rate futures traders and bond market traders are that if the Bank of Japan, which has long been difficult to predict in its monetary policy decisions, chooses to release a "hawkish" signal for a significant interest rate hike at next week's policy meeting, it may lead to a substantial expansion of yields on long-term (10 years and above) Japanese government bonds and U.S. government bonds, with "term premiums" also increasing significantly, which could likely lead to a severe sell-off in the Japanese stock market and even global stock markets.

However, informed sources indicated that if the tariff measures led by the Trump administration have very limited disturbance to Japan's basic price trends, central bank officials would consider this favorable for discussing whether to persist in raising interest rates.

Will the Bank of Japan raise interest rates again before the end of the year?

The above statements suggest that as long as the global trade situation becomes clearer and Japan's inflation rate remains stable around the Bank of Japan's target of 2%, the Bank of Japan may choose to raise interest rates again before the end of this year.

The Bank of Japan will hold a meeting next Monday and Tuesday, and the market generally expects its policy to remain unchanged. Investors are mainly focused on the central bank's policy path expectations, future government bond purchase plans, and whether the actual pace of reducing bond purchases after spring next year will slow down as predicted by former officials of the Bank of Japan.

Former Executive Committee member of the Bank of Japan, Eiji Maeda, stated that the Bank of Japan may slow down the pace of reducing government bond purchases in the next fiscal year, potentially reducing by 200 billion yen each quarter. Maeda indicated that the Bank of Japan will maintain the benchmark interest rate at 0.5% next week, with the next rate hike possibly occurring in October or March next year, depending on the economic and trade negotiation conditions.

"October could be the earliest point," Maeda stated. "But if the Bank of Japan wants to have full confidence in next year's spring wage negotiations, it may wait until March next year."

After the next interest rate adjustment, the Bank of Japan is likely to raise rates every six months, with a target terminal rate of around 1.5% to 2%, higher than the market's general expectation of 1%, Maeda stated in an interview.

Japan's core inflation indicator has been at or above the Bank of Japan's anchored target of 2% for three consecutive years (as of April), and currently, inflation is the highest among the G7 countries. Maeda believes that the Bank of Japan has somewhat lagged behind the curve, but the recent uncertainties brought by tariff policies have temporarily provided important reasons for both the Bank of Japan and the Federal Reserve to remain on hold "The Bank of Japan must be very cautious," Maeda said. "When there are dark clouds over the economy, they should not rush to normalize policy, but at the same time, they must avoid the risk of falling behind the situation."

If Japanese government bond yields soar, will the 'term premium' return to the spotlight?

If the Bank of Japan clearly signals in its post-meeting statement that it will slow down the pace of debt reduction in the next fiscal year or at another time, or signals that it is not in a hurry to raise interest rates, the recent "Japanese government bond sell-off storm" that has been hovering over the financial market may come to a calming period, significantly cooling the pessimistic sentiment among market participants that Japanese government bonds will trigger a global market crash.

If rising expectations for interest rate hikes by the Bank of Japan lead to another cold reception for Japanese government bond auctions, causing long-term Japanese government bond yields to rise sharply, it may again trigger an upward trend in long-term U.S. Treasury yields, ultimately bringing back the dreaded "term premium" that once terrified investors into the spotlight, driving the stock and bond markets into another period of intense volatility.

The so-called term premium refers to the additional yield compensation that investors require for holding long-term bonds. Looking ahead to the next few years, the imposition of tariffs may even become a common consensus in the Western world, so in the increasingly divided "de-globalization" era, China and Japan may significantly reduce their holdings of U.S. Treasuries. The ever-expanding U.S. Treasury interest, military defense spending, and domestic policies led by the Trump administration's tax cuts are set on a path of significant expansion, leading to heightened market concerns about the sustainability of the U.S. government's growing debt and long-term inflation risks. Coupled with the spillover risk of rising Japanese government bond yields, the "term premium" that once sent shivers through the financial market is poised for a comeback, with the 10-year U.S. Treasury yield, which serves as the "anchor for global asset pricing," even brewing a wave of growth more wild than the surge to over 5% in 2023.

However, for officials at the Bank of Japan, the global trade outlook remains uncertain. Japan's chief negotiator will arrive in Washington on Friday for the sixth round of talks with the United States, preparing for the upcoming G7 summit in Canada. Japanese Prime Minister Shigeru Ishiba may meet with U.S. President Donald Trump during the summit.

Japan is seeking to eliminate the 25% tariff on automotive products in the negotiations, but Trump stated on Thursday that he is considering further increasing tariffs on imported cars from the U.S.

Insiders say that if trade issues show clearer progress, given that Japan's price trends remain strong, the central bank will still consider the interest rate hike process.

Insiders cited officials revealing that Japan's price growth has recently been slightly higher than expected at the beginning of the year, and prices in the second half of the year are also expected to be higher than the Bank of Japan's previous expectations. Some Bank of Japan officials believe that the resilience of inflation reflects significant changes in pricing behavior, and the sharp rise in rice prices may further elevate consumer expectations for inflation.

The latest overall inflation data for Japan shows that in April, Japan's core inflation rate accelerated to 3.5%.

An economist survey earlier this month focusing on the timing of the Bank of Japan's interest rate hike indicated that about 34% of economists expect the Bank of Japan to wait until January next year to raise interest rates again, making that month the most favored next rate hike timing among investors