By Chris Weston, Head of Research, Pepperstone
July 23, 2025:
Pretty funky day in Japan – the PM has laid out that he’ll step down this month, so traders grapple with what’s next and try to price the risk around politics, bond issuance and fiscal under a new supplementary budget – the LDP party will hold an internal meeting on 31 July, with an Extraordinary Diet session held the day after (lasting 5 days)…
Today’s 40yr JGB auction was poor despite the MOF cutting the issuance size by a fair whack – the lowest bid/cover since 2011, a chunky tail and the buyers were mostly short-term players…. so the ultra long-end of the JGB curve – which was reasonably well behaved for much of trade, has lost the bid and yields are up 9bp on the day. Breakevens (inflation expectations) have also moved 10bp higher, as so real rates have been contained ….
The BoJ has stated they are in no rush to raise rates despite seeing a fairly positive outcome in tariffs, and at least having something to model their economic scenarios…. JP swaps price 21bp of hikes by December, with the September BOJ meeting looking somewhat ‘live’…
The BoJ will now need to work with the MoF and the big JP banks/primary dealers to address liquidity needs in the long-end, and to ward off another big buyers strike….the moves in the JGB market possibly set to flow thru to the UK gilt market…
The NKY225 (+3.6%) & TOPIX have paid little attention to the sell off in bonds, and has feasted on the tariff news… auto’s, financial and Healthcare have gone for it…. and the JP equity index has broken out hard…. maybe the equity market will revert to looking at JGBs, and traders will by volatility to hedge..
A reversal higher in USDJPY has also been supportive of NKY225 upside, although the spot JPY is well behaved on the day and USDJPY 1-week vols remain at low levels…So, a lot going on in Japan and it will be front and centre as the dislocations across markets, and the poor visibility to price risk mean reduced liquidity and higher volatility