Deputy Governor of the Bank of Japan: Appropriate policy adjustments are key to stabilizing the bond market. The timing of interest rate hikes will take into account the situation in the Middle East.

With the yield on Japanese government bonds rising to near thirty-year highs, Bank of Japan Deputy Governor Iwata-Kanemitsu stated on Tuesday that it is crucial to maintain market confidence through appropriate policy adjustments and highlighted that the development of the situation in the Middle East will be a key factor in determining the timing and pace of interest rate hikes. Addressing the recent increase in Japanese government bond yields, Iwata-Kanemitsu stated that this is likely part of a global surge in yields, driven by market concerns over the sharp rise in fuel costs resulting from the Middle East conflict which could accelerate global inflation. "The key is to maintain market confidence, meaning that the central bank will adjust its monetary easing stance at an appropriate pace based on economic, price, and financial conditions to effectively control inflation," Iwata-Kanemitsu said. Furthermore, he emphasized that given Japan's real interest rates are still at extremely low levels, the central bank expects to continue raising policy rates, but the "timing and pace of adjustments will be prudently decided through careful analysis of how the situation in the Middle East impacts Japan's economy and prices, via assessing probabilities and related risks against baseline scenarios." Recently, concerns about global inflation stemming from the Iran conflict, as well as expectations of fiscal expansion in Japan, have triggered a sell-off in Japanese government bonds. The benchmark 10-year Japanese government bond yield briefly touched 2.8% on Monday, the highest level since October 1996. Iwata-Kanemitsu's remarks have been widely interpreted by the market as indicating an open attitude towards a near-term rate hike, with market expectations currently leaning towards the Bank of Japan raising rates at its policy meeting next month. However, the policy path also faces pressure from the government. Prime Minister Takaichi Saori, known for favoring monetary easing, subtly expressed a desire last week for the central bank to maintain policy stability to cushion the economic impact of the Iran conflict. She also called for additional budget measures to help households cope with rising living costs. Following a meeting with Bank of Japan Governor Ueda Kazuo last Friday, Takaichi Saori stated that she hopes the central bank will consider government measures to curb inflation and strengthen the economy in its decision-making process. According to pricing in the overnight swap market, traders' expectations of a rate hike by the Bank of Japan in June rose above 80% last week but slightly declined to around 76% following the meeting between the two officials.