Rusui ignites speculation of an extraordinary rate hike! The Bank of Japan may shift from gradual rate hikes to a "bold 50 basis point hike"

The CEO of Japan's financial giant SMBC Group, Masahiro Miki, stated that if the Bank of Japan were to increase interest rates in an extraordinary manner (starting with a 50 basis point increase), it would be more favorable for the Japanese government bond market which has been experiencing large-scale sell-offs and rising yields this year. The market has priced in a probability of nearly 80% for the Bank of Japan to restart interest rate hikes at its monetary policy meeting on June 15-16. BOJ Deputy Governor Ryozo Himino also stated that they would continue to raise interest rates at an appropriate pace while considering the situation in the Middle East in their decisions. The minutes of the BOJ meeting in April also showed that several members advocated for an immediate rate hike, with some directly mentioning the possibility of action in June. Miki stated in an interview on Wednesday that he expects the Bank of Japan to restart interest rate hikes in June or July to combat domestic inflation. He mentioned that unless the BOJ's rate hike is substantial, it is unlikely to have a significant impact on the market trading landscape. Miki emphasized that the BOJ's best potential option might be to consider an extraordinary rate hike to combat inflation - if they were to take the bold move of a 50 basis point increase, it would be a measure not taken by the central bank since the Japanese asset bubble period in 1990. In the interview, Miki said, "If they take bold action" by raising rates by 50 basis points, it may be better for the bond market." When asked if the Bank of Japan was lagging behind in terms of the yield curve, Miki replied, "It's a tricky question. I indeed think there is some merit to it." SMBC's CEO suggested a 50 basis point "bold move," while the Japanese bond market awaits the most hawkish policy since 1990. Observers of the Bank of Japan have been discussing in recent weeks whether the central bank is reacting too slowly to the increasing inflation pressures. In recent weeks, Japanese government bond yields have risen sharply, mainly due to market concerns about a potential surge in prices from the Iran conflict and significant doubts about the stimulus-driven fiscal policy led by Prime Minister Sanae Takamichi. This has led institutional investors to sell off government bonds on a large scale, demanding higher quality "term premiums." Since ending its ultra-loose monetary policy in March 2024, the Bank of Japan has been moving towards raising interest rates gradually. Investors generally expect that the BOJ's Monetary Policy Committee, led by Governor Kita Naoto, will most likely raise the key rate by 25 basis points in June at the earliest. The last time the BOJ raised rates by more than this level was in August 1990 when, in order to curb the surge in asset prices such as real estate during the Japanese economic bubble period, the Bank of Japan raised rates by 75 basis points to 6%. After the bursting of Japan's economic bubble, the country entered a period of deflation and economic stagnation that lasted for decades. For economists, a significant rate hike would be a major surprise. However, minutes from the BOJ's policy meeting in March showed that a member directly suggested that they should consider the magnitude of any rate hike, implying that a faster pace of rate hikes may be necessary. Miki mentioned that it was the right decision for the government not to issue more bonds to finance a supplementary budget aimed at mitigating costs related to the household energy crisis. Prime Minister Sanae Takamichi stated earlier this week that the government would provide funding for its supplementary budget without increasing the issuance scale of bonds based on the calendar year benchmark. This move was likely aimed at alleviating concerns about Japan's public financial situation, but it did not fully ease doubts in the market about the future path of stimulus-driven fiscal policy. Miki suggested that given the high energy cost pressures resulting from the Middle East geopolitical situation, the Japanese stock market may be "overvalued". However, he expected companies to continue taking proactive measures to improve investment returns. The Topix index, one of Japan's key stock indices, reached a new all-time high on Wednesday morning. The index has risen over 15% so far this year. Miki mentioned that SMBC's clients, especially refineries and chemical manufacturers, were still trying to secure supplies despite the situation in the Middle East; he added that market concerns were more related to price increases and their impact on profits. SMBC expects that the geopolitical conflict will likely be resolved before August, and energy business in Gulf countries will return to normal in the following months. Earlier this month, SMBC forecasted that it would achieve record annual profits once again, boosted by higher interest rates benefiting loan profitability and increased trading volume from the global bull market. SMBC's stock price has risen by 27% this year, soaring over 400% since the end of 2020. As the bank seeks to accelerate the use of artificial intelligence, Miki also provided reassurance to employees concerned about AI's impact. He said that while some positions may be replaced by AI, "it doesn't necessarily mean we will lay off employees. We will make efforts to retrain them." Earlier this year, the bank announced plans to replace around 5,000 administrative jobs in Japan with AI over the next decade. Miki stated that SMBC is keen on expanding its business footprint in countries such as India and the United States. He also pointed out another potential expansion market: Australia. Miki said, "We will work to deploy professionals there." He mentioned that SMBC currently has over 200 employees in Australia and may increase this number to around 300. With the Bank of Japan on the brink of raising interest rates, the CEO of SMBC's call for a "bold move" may actually benefit the bond market. What the CEO of SMBC emphasized was not simply a hawkish stance, but the belief that if the central bank acts overly cautiously, it could allow the Japanese bond market to continue trading with uncontrollable inflation and policy lagging behind. A decisive action may instead lead to short-term market pain in exchange for sustained stability in long-term government bond yields. If the market has already determined that the Bank of Japan is lagging behind in terms of the inflation curve, small and delayed interest rate hikes may continue to lead bond investors to demand higher inflation compensation and term premiums. A more definite 50 basis point hike might help the Bank of Japan reanchor inflation expectations, thereby stabilizing long-term Japanese bond yields. In other words, a significant rate hike may temporarily raise policy rates, but if it can convince the market that the Bank of Japan is seriously combating inflation, long-term bond yields may actually fall or at least stop rising uncontrollably. Recently, the yield on Japan's 10-year government bonds rose to 2.8%, reaching a high not seen since 1996, indicating that the market is punishing "inflation and fiscal uncertainty."