Mizuho Financial Group's CEO, Masahiro Kihara, has suggested that the Bank of Japan (BOJ) could benefit the Japanese government bond (JGB) market—which has faced significant selling pressure and rising yields this year—by implementing an unusually large interest rate hike, starting with a 50 basis point increase. Market pricing for a rate hike at the BOJ's monetary policy meeting on June 15-16 had approached 80%, and BOJ Deputy Governor Ryozo Himino has indicated that rate hikes will continue at an appropriate pace, with Middle East geopolitical tensions factored into decision-making. The summary of the BOJ's April meeting also revealed that several board members advocated for an immediate hike, with some directly mentioning the possibility of action in June.

In a media interview on Wednesday, Kihara stated he expects the BOJ to resume rate hikes in June or July to combat domestic inflation. He emphasized that unless the BOJ implements a substantial hike, it is unlikely to significantly impact market trading patterns. Kihara stressed that the BOJ's best potential option might be to consider an outsized rate increase to counter inflation—a bold 50 basis point move would be an action not taken since Japan's asset bubble era in the 1990s. "If they act boldly," he said, "with a 50 basis point hike, it might be better for the bond market." When asked if the BOJ is behind the yield curve, Kihara described it as a "tricky question" and acknowledged there is some truth to that.

The notion of a 50 basis point "big move" from Mizuho's CEO comes as JGB markets await what could be the most hawkish policy shift since 1990. BOJ watchers have recently debated whether the central bank is reacting too slowly to mounting inflationary pressures. In recent weeks, JGB yields have surged sharply, primarily due to market concerns over significant price increases triggered by the Iran conflict and major doubts about the stimulative fiscal policies led by Prime Minister Takaichi Sanae's government. This has led institutional investors to sell bonds on a large scale, demanding higher "term premiums."

Since ending its ultra-loose monetary policy in March 2024, the BOJ has been advancing a gradual rate-hike process. Investors widely expect the policy board, led by Governor Kazuo Ueda, to raise the key rate by 25 basis points as early as June. The last time the BOJ hiked rates by more than that was in August 1990, when it raised rates by 75 basis points to 6% to curb soaring asset prices, such as real estate, during Japan's bubble economy. After the bubble burst, Japan entered decades of deflation and economic stagnation.

For economists, a large rate hike would be a major surprise. However, meeting minutes show that at the BOJ's March policy board meeting, one member directly suggested considering the magnitude of any rate hike, hinting that faster increases might be necessary.

Kihara noted that the government made the right choice by not issuing more bonds to fund a supplementary budget aimed at alleviating household energy cost pressures. Prime Minister Takaichi Sanae stated this week that the government would fund its extra budget without increasing bond issuance on a calendar-year basis, likely to ease market concerns about Japan's public finances. However, this move has clearly failed to quell market questions about the future path of stimulative fiscal policy.

Kihara suggested that Japanese stocks might be "overvalued" given the high energy cost pressures from Middle East geopolitical tensions, although he expects companies to continue taking active steps to improve investment returns. The TOPIX, one of Japan's benchmark stock indices, hit a new all-time high on Wednesday morning, having risen over 15% this year.

Kihara mentioned that Mizuho's clients, particularly refiners and chemical manufacturers, are managing to secure supplies despite the Middle East situation. He added that market worries are more related to price increases and their impact on profits. Mizuho expects the geopolitical conflict to be resolved by August, with energy operations in Gulf countries returning to normal in the following months.

Earlier this month, Mizuho projected it would achieve another record annual profit, driven by higher interest rates boosting loan profitability and a surge in trading volumes amid a global stock market rally. Mizuho's stock has risen 27% this year and surged over 400% since the end of 2020.

As the bank seeks to accelerate its use of artificial intelligence (AI), Kihara also offered some reassurance to employees concerned about AI's impact. He stated that while some roles may be replaced by AI, "this doesn't necessarily mean we will cut jobs. We will strive to retrain them." Earlier this year, the bank indicated plans to replace about 5,0 administrative clerical positions in Japan with AI over the next decade.

Kihara expressed Mizuho's eagerness to continue expanding its business presence in countries like India and the United States, and highlighted another potential market for expansion: Australia. "We will work to deploy professionals there," he said, noting that Mizuho currently has over 200 employees in Australia and could increase that number to around 300.

With a BOJ rate hike appearing imminent, Mizuho's CEO advocates that a "bold move" could actually benefit the bond market. Kihara's emphasis is not merely on a hawkish stance but on the idea that if the central bank is overly cautious, it could allow the JGB market to continue trading on fears of uncontrolled inflation and policy lag. Decisive action might exchange short-term market pain for sustained stability in long-term bond yields.

If the market already believes the BOJ is behind the inflation curve, small, delayed hikes could lead bond investors to continue demanding higher inflation compensation and term premiums. A clearer 50 basis point hike could help the BOJ re-anchor inflation expectations, thereby stabilizing long-term JGBs. In other words, while a large hike would push up policy rates in the short term, if it convinces the market that the BOJ is serious about fighting inflation, long-term bond yields might experience less depreciation and less失控. The underlying logic is "credibility in exchange for term premium."

Japan currently faces a combination of energy price-driven, weak yen-induced imported inflation, wage increases, and service inflation. The BOJ's new trend inflation indicator rose to 2.8% in April, above the 2% target. Corporate service prices increased 3.0% year-on-year in April, also indicating that cost pass-through and the wage-price cycle are strengthening. If the BOJ continues to lag, markets may worry about entrenched inflation,加重 fiscal pressures, further yen weakness, leading to JGB selling and pushing up long-term yields. This is why, from Mizuho's CEO perspective, a "rate hike" is not necessarily always negative for bonds.

For short-term bonds, a rate hike would certainly bring upward pressure on yields. However, for long-term bonds like 10-year, 20-year, or 30-year maturities, the key is whether the market believes future inflation will be contained. If a large rate hike reduces future inflation tail risks, long-term yields might反而 decline or at least stop rising无序. Recently, Japan's 10-year government bond yield一度 rose to 2.8%, reaching its highest level since 1996, illustrating that the market is already penalizing "inflation and fiscal uncertainty."