(Bloomberg) -- The interest-rate swap market is yet to price in the pace and size of rate hikes that economists expect from the Bank of Japan this year.
Yen forward two-year one-month swaps are trading around 0.73% Friday, suggesting traders expect only two quarter-percent rate hikes by the central bank in the coming two years from the current level of 0.25%.
This implies a slower pace of increases than forecast by BOJ watchers: 68% of economists expect it to lift rates again in 2024, with 44% forecasting a move in December and 24% in October, according to a Bloomberg survey. About 20% predict a January hike.
“The BOJ made it clear that it will continue to raise interest rates if the outlook is in line with expectations,” said Masayuki Koguchi, executive fund manager at Mitsubishi UFJ Asset Management. The central bank also plans to reduce bonds purchases, and the resulting increase in debt supply will be like “body blows” for the market that may push up yields, he said.
Japan’s central bank lifted interest rates to 0.25% on July 31 and said more increases may come depending on the economic and price outlook— that may put more upward pressure on Japanese bond yields if traders price in the possibility.
Yields on Japanese government bonds declined Friday in line with moves in US Treasuries, with the 10-year yield dropping 7 basis points to 0.965% on Friday. It had touched 1.06% on Wednesday, when the BOJ pushed up rates.
With weak US economic data prompting traders to price in three quarter-point cuts from the Federal Reserve this year, BOJ rate hikes may further narrow the yield gap between Japan and the US and support the yen against the dollar.
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