SMBC Nikko: Fed Rate Hike Expectations May Force Bank of Japan to Follow, Japanese Bond Yields Face Significant Volatility Risk

(1) SMBC Nikko Securities strategist Ataru Okumura stated that strong US inflation data is boosting expectations for Federal Reserve interest rate hikes, and the Bank of Japan may have to follow suit to avoid yen depreciation and rising bond yields. (2) He warned that if the Federal Reserve tightens its policy without taking stricter AI regulations into consideration, there is a risk of triggering a sharp economic slowdown. (3) The Japanese government bond market is facing a tug of war: on one hand, there are concerns that the Bank of Japan is lagging in responding to inflation; on the other, there is hedging against economic downturns. As the market focus shifts between these two risks, yields could become highly volatile.