Nomura Cautions: BoJ's Imminent Rate Hike Could Be Derailed by Iran Conflict

Stock News
05/28

Market indicators suggest traders are widely betting on a Bank of Japan interest rate hike in June or July, but an analyst from Nomura Group expresses reservations. According to pricing in the swaps market, traders see about a 75% chance of a hike in June and a probability as high as 92% for July. However, Michio Saito from Nomura's Capital Markets Research Institute points out that persistent risks from the Iran conflict could lead to further oil price increases, putting pressure on Japan's energy-import-dependent economy and potentially making the central bank more cautious about raising rates. Saito, an executive research fellow at the institute and a former key bond policy official at Japan's Ministry of Finance until 2023, stated at a financial industry event on Wednesday, "The timing for a rate hike has arrived, or at least is very close. But I'm uncertain whether the BoJ's policy board can proceed smoothly with the hike." Saito also noted that Japanese government bond yields may have risen excessively due to inflation concerns and potential increases in government fiscal spending. He mentioned that the benchmark 10-year JGB yield briefly climbed to 2.8% on May 18, marking its highest level since 1996. However, compared to the yield curve for other maturities, the current 10-year yield appears elevated, with a reasonable range likely between 2.0% and 2.5%. Saito warned that if shipping disruptions in the Strait of Hormuz persist, concerns over crude oil and liquefied natural gas supply would intensify further. For Japan, "this would not only lead to higher prices but also risks bringing economic activity itself to a standstill."

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