BOJ Rate-Hike Bets Ramp Up As Ueda And Himino Spook Traders

(Bloomberg) -- Traders now see the Bank of Japan’s December policy meeting as a “live” event, with comments from Governor Kazuo Ueda and one of his deputies shaking up wagers in the rates and currency markets.  

Overnight-indexed swaps at one point on Thursday showed an almost 45% chance that the BOJ would end its negative interest rate policy this month, with remarks Wednesday from Deputy Governor Ryozo Himino cited a key driver of the move. Just two days ago, they showed a 3.5% risk.

Meanwhile, comments from Ueda in parliament this morning added upward pressure on bond yields and the yen. Himino presented a hypothesis for what might happen if the central bank ended the world’s last negative interest rate regime. His boss told lawmakers that handling monetary policy will get tougher from the year-end and through next year.

Japan’s benchmark 10-year government bond yield jumped 10.5 basis points, the most since December 2022, to 0.75% on Thursday. It is set to snap a three-day decline, with the move getting an extra boost after weak demand from an auction of 30-year government debt. The yen strengthened about 0.5% against the dollar. 

Himino’s speech was perceived as relatively hawkish and turned the BOJ’s Dec. 18-19 meeting “live,” Daiwa Securities Co. strategists Ryoma Kawahara and Kazuya Sato wrote in a note. 

Shoki Omori, a strategist at Mizuho Securities Co., pointed to the selling of bonds and futures, as well as a boosting of swap rates.

“Himino is cracking the belly of the curve,” said Omori. “It caused investors to begin pricing in the central bank’s exit from ultra-loose monetary policy in January rather than previous consensus view of April.”

Adding to tension in the market, Jiji reported that Ueda had arrived at Prime Minister Fumio Kishida’s office in Tokyo this afternoon.

The yen was up against all of its Group-of-10 peers. Versus the dollar it was near an almost three-month high of 146.23 reached earlier in the week. 

“It’s all about the BOJ,” said Mingze Wu, a currency trader at Stonex Financial Pte. “FX traders appear happy to be buying the yen on risks of a BOJ move in December.”

In another sign that expectations of policy change are growing, today’s auction of 30-year sovereign securities had the lowest bid-to-cover ratio since 2015. The so-called tail, or the difference between the average and lowest-accepted prices, was the longest on record. Yields on the 30-year debt jumped 9.5 basis points to 1.69%.

Adding fuel to speculation of a shift from the ultra-loose monetary policy, the BOJ has been conducting a special survey of market participants, including a workshop to discuss its impact and side effects. 

Some market participants also see a growing possibility of a US rate cut hastening the end of the BOJ’s negative rates. 

“It is probably easier for the BOJ to take action in January when the Fed is unlikely to either raise or cut its benchmark rate,” said Tadashi Matsukawa, head of fixed-income at PineBridge Investments Japan Co. The central bank is likely to end the negative rate policy in January, he said. 

(Updates bond and currency performances.)

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