MediumIV Macro Policy & Sovereign Debt27 October 2026, Tuesday
Japan's far-end yields stay high even as the BOJ holds
The BOJ goes into its 29-30 October meeting with the policy rate at 1.25% and not one economist in the surveys expecting a hike. Ministry of Finance data still put the thirty-year government bond yield at 3.884% on 26 October and the forty-year at 3.900%.
The policy rate was raised from 1.00% to 1.25% in September on a 7-2 vote, with both dissents arguing for more tightening. MUFG's 26 October preview sees no change this time, though the updated Outlook Report may effectively declare that underlying inflation has reached the 2% target. Governor Ueda said after the G20 meetings that underlying inflation was broadly close to 2%. The decision and press conference land on Friday at 06:30 GMT, and a repeat split from the two members who dissented last time is seen as the main risk for the yen.
The far end of the curve is moving independently of the policy rate. The ministry's benchmark yields for 26 October show 2.824% at ten years, 3.630% at twenty, 3.884% at thirty and 3.900% at forty. On 27 October the ministry reopened off-the-run 20-, 30- and 40-year lines and sold ¥248.9bn; this enhanced liquidity auction drew bids of 3.98 times the amount on offer, against 3.55 times in the previous round. Such auctions plug gaps along the curve and carry less price-concession risk because they add no new maturity supply.
The durable constraint is the gap between the pace of monetary policy and the term premium. Dollar-yen moved from just above 156.50 on Monday to just above 157.50; yen buying on 22 and 23 October had pushed the pair under 157.00, its lowest since 18 September. The six-month range runs from near 153.00 on 8 September to near 164.00 in July. With the policy rate parked at 1.25%, a forty-year yield of 3.90% shows normalisation being priced faster at the far end than at the front.
Talay assessment
Bottom line
What matters is not the decision but the language of the Outlook Report. Writing that underlying inflation has reached 2% pulls a December hike forward and lifts the front end. The far end is priced separately: a forty-year yield stuck at 3.90% shows the repricing of the debt stock running ahead of the policy rate. Demand of 3.98 times at the liquidity auction says buyers are still there at the far end, but at a higher price.
Likely effects
- Japanese far-end yieldsNegative1–6 months
Even with the policy rate unchanged, thirty- and forty-year yields hover near 3.9%, so public debt service gets dearer with every reissue.
- YenUncertainWeeks
A hawkish hold pulls December pricing forward and pushes dollar-yen down from 157.50; a dovish tone does the reverse.
- Global term premiumNegative6 months+
Rising Japanese far-end yields draw domestic investors out of foreign bonds and thin demand at the far end in the United States and Europe.
Possibilities, ranked
- 1Hawkish hold55%
The rate stays at 1.25%, the Outlook Report records inflation reaching the target and December hike pricing firms up.
Watch: The underlying inflation wording and the number of dissents in the 30 October Outlook Report
- 2Plain hold30%
The text is unchanged, no dissents appear and far-end yields hold their current range.
Watch: A unanimous vote and dollar-yen above 158.00
- 3An October hike15%
The committee delivers a second consecutive increase, front-end yields jump and the yen firms quickly.
Watch: A policy rate raised to 1.50% in the 30 October decision
Probabilities are calibrated judgement based on the sources, not measurement, and are revised as new information arrives. Not investment advice.
Market reaction
Indicators affected
- Japan thirty-year▼ 3.884%
- Forty-year JGB▼ 3.900%
- Liquidity auction demand▲ 3.98x
Historical context