From Yen to JGBs: The US-Japan Policy Game is Reshaping Global Interest Rate Pricing

On September 18, the focus of the global interest rate market is shifting from the Federal Reserve's decisions to how US and Japanese policies are transmitted through exchange rates and bond markets. After the rate hike by Waller, Trump did not publicly pressure Powell as he did in the past; instead, he expressed continued support for Waller. Waller emphasized that the rate hike was a decision made by the Federal Reserve after careful evaluation. This mode of "maintaining communication and avoiding direct conflict" has temporarily reduced political friction, but the real test lies in whether future policy decisions will continue to diverge from the interests of the White House.

Japan, on the other hand, faces more direct policy pressure. In recent months, Bessen has gradually linked yen stability, fiscal discipline, and the Bank of Japan's rate hikes. While Japan hopes for US assistance in stabilizing the exchange rate, the US has instead demanded that Tokyo address inconsistencies in fiscal and interest rate policies. As Japan's 10-year government bond yield briefly surpassed 3%, high budget demands and fiscal expansion began to create a more direct contradiction with bond market financing costs. The Japanese government must maintain policies that stimulate growth and reduce living costs while avoiding further pressure on JGBs that could push up the yen and global interest rate risks.

Therefore, the focus of the Bank of Japan today is no longer just on "whether to raise rates," but on whether Ueda can open up space for normalization through policy guidance. The market generally expects a rate hike of 25 basis points to 1.25%, but if subsequent guidance is cautious, the yen, which has already priced in tightening expectations, may come under pressure; conversely, if the central bank releases clearer signals for further rate hikes, JGB yields may still face upward pressure. This creates the core contradiction of Japanese policy: higher interest rates stabilize the yen and curb inflation, but they also increase the government's fiscal financing costs.

The Bank of England, meanwhile, has kept its rate unchanged at 3.75% while canceling its long-term bond sale plan and slowing quantitative tightening, contrasting with the rate hike pressures faced by Japan. As the US, Japan, and the UK are at different policy stages, what the global bond market truly needs to reprice is not just the next step of a single central bank, but how high interest rates, fiscal demands, and central bank balance sheets jointly determine the global long-term funding costs.

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