An Imported Rise in Japan’s Yields Could Tempt Bond Bulls

(Bloomberg) -- If the U.S. election manages to catapult Treasury yields and their global peers higher, that could create an opportunity for Japanese bond bulls, given the muted outlook for inflation in the Asian nation.

Japan’s yield curve has been steepening alongside its American counterpart, as the reflationary theme that has taken hold in Treasuries permeates global bond markets. The 10-year, 30-year curve is close to its highest since April 2019.

The country’s inflation expectations have been similarly upbeat. Yields on inflation-linked bonds -- which show market pricing for the average rate over the next decade -- are well above pre-pandemic levels.

But that seems at odds with what’s happening on the ground. Key consumer prices failed to log gains for a sixth straight month, according to data released Friday. That will put increased scrutiny on the Bank of Japan, when it gives its latest inflation outlook.

The central bank is likely to consider slightly adjusting forecasts to reflect the short-term downward impact on prices of the government’s recent travel subsidies, according to people familiar with the matter.

Despite this, 30-year yields are already close to their highest level this year and a shift up from here appears increasingly hard to justify.

Furthermore, a so-called “Blue Wave” scenario, should Democrats claim victory in both the White House and Congress next month, could amplify the reflationary impulse and send Treasury yields even higher and the dollar lower.

It would take a slide of only about 3% in the dollar-yen to push the Japanese yen to near its strongest since 2016, offering a further blow to the nation’s exporters.

That could heap pressure on the BOJ, opening up the door for further quantitative easing and making the move higher in Japanese yields a short one.

Below are the key Asian economic data and events due this week:

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