Sumitomo Mitsui Financial Group's global markets chief, Arihiro Nagata, said the Bank of Japan (BOJ) should provide explicit guidance on the trajectory of monetary policy once it lifts rates in June, a move he and his firm expect, in order to calm strains in the bond market.
Nagata argued that the BOJ's most important task at its June 15-16 policy meeting is to make the future course of normalisation clear. He said that if the central bank lays out that path with sufficient clarity, "the more the room for further increases in long-term interest rates will likely diminish."
He added that a simple affirmation from the BOJ that its outlook is broadly in line with prevailing market expectations would be adequate. Markets already embed nearly two rate hikes this year and, to some extent, additional tightening beyond that, Nagata noted.
The appeal for firmer forward guidance follows market developments that have seen the 10-year government bond yield reach 30-year highs and the yen slide back toward the psychologically important 160-per-dollar level despite substantial intervention efforts.
The BOJ left interest rates unchanged in April but signalled the possibility of a near-term increase as inflationary pressures accumulated. Nagata said the situation has been complicated by the Middle East conflict, which he said has pushed up energy costs; higher energy prices both raise inflation and impose a drag on Japan's import-dependent economy.
Bond tapering and purchase plans under review
At the June meeting the BOJ will review a bond taper plan that runs through March next year and is expected to present a fresh framework for fiscal 2027. With no alteration anticipated to the existing taper plan, market attention has turned to whether the BOJ will keep paring monthly bond purchases in fiscal 2027 or hold the current pace.
Nagata said Sumitomo Mitsui Financial Group has proposed that the BOJ halt further tapering and maintain monthly bond purchases at about 2.1 trillion yen from April next year. He said reducing purchases to that level "would be manageable without causing stress in the market, while allowing market functioning to recover." The dollar equivalent cited by Nagata for that monthly amount is $13.15 billion.
SMFG's market positioning
Addressing his own firm's portfolio approach, Nagata said they would be prepared to buy long-term government bonds if yields reached around 3 percent. He stressed, however, that such investment decisions would be taken cautiously and only after assessing overall market supply-demand conditions.
Markets will also watch whether the BOJ signals any discrepancy with market-implied tightening; Nagata suggested that a view of close alignment between the BOJ and markets could reduce the scope for further upward pressure on long-term yields.
Conversion used in the conversation: $1 = 159.6400 yen.