Japan Rates Weekly: No support for 10y sector

Research evidence excerpt

Japan Rates Weekly: No support for 10y sector

Japan Rates Weekly

03 July 2026 Citi Research

10y softening on fiscal policy risk

The yield curve has steepened. The reasons are the government’s ¥370trn growth

investment strategy and the pressure on the BoJ thought to be contained in policy

documents on budgetary requests. The USDJPY has exceeded its peak of the past

few years, and further forex intervention appears likely at any time. Unless interest

rates clearly decline overseas there will be increasing concern that the BoJ is behind

the curve.

Rate hike pricing has been brought forward somewhat in the OIS market, rising to

about 20% for the September meeting and 60% for the October meeting as of AM

session close on July 3. This is not a particularly large change. Policy Board

members Naoki Tamura and Hajime Takata could again advocate for a rate hike at

the July meeting, and if there is further forex intervention September could also be

a live meeting (we see max pricing at 40%). Pricing for the October meeting is likely

to exceed 70% in this process, but the probability of a rate hike would need to rise

further for it to exceed 80%.

Looking ahead further, the M27-H28 is relatively stable, and interest rates rise

significantly from FY3/29 onward. Given also the strength of the 2y auction this

week there has been no increase in rate-hike expectations for CY27 H2. The

consensus is that under Governor Kazuo Ueda’s team the BoJ will maintain firm

control over interest rates, and there has been no shift in the market view on the

terminal rate. This is also seen as causing a commensurate cheapening in the long-

term sector. In fact, change in the forward start 1y interest rate points to a big rise

from FY3/29.

Such pricing looks somewhat unusual.