Iran Situation Unclear, Nomura: BoJ's Rate Hike Path is Far From Smooth

Nomura Capital Market Research Institute Executive Researcher Michio Saitou stated at a financial industry event on Wednesday that the timing for interest rate hikes has "already arrived, or at least is very close," but he is uncertain whether the Bank of Japan (BOJ) policy board can smoothly proceed with these increases. Saitou, who previously held a significant position in bond policy at Japan's Ministry of Finance before 2023, carries considerable weight with his judgment.

As for the swap market, it is currently priced to show that traders expect a 75% probability of the BOJ raising interest rates in June, with the cumulative probability rising to 92% by July. However, Saitou pointed out that the oil price risk from the Iranian situation is a key variable. Japan is highly dependent on energy imports, and if the Strait of Hormuz continues to be blocked, concerns over the supply of crude oil and liquefied natural gas will skyrocket. At that point, Japan would face not only inflationary pressures but also "the risk of economic activity itself coming to a halt."

In terms of bond markets, Saitou believes that Japanese government bond yields have overshot. On May 18, the 10-year Japanese bond yield rose to 2.8%, the highest since 1996, and he views this level as significantly high compared to the overall shape of the yield curve. A reasonable range would be between 2.0% and 2.5%. Inflation concerns and expectations of increased government fiscal spending are the main factors driving yields to rise excessively.<\p>