The real intention behind Bassent's visit to Japan: not just the yen, but with a focus on Japanese government bonds.

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U.S. Treasury Secretary Bessent has completed his visit to Japan. Japanese Finance Minister Satsuki Katayama said on Tuesday that Bessent "fully understands" Japan's yen intervention policy, while Nomura previously warned that the stability of the Japanese government bond market is the real risk management priority of Bessent’s visit.

According to Chasing Wind Trading Desk, Nomura Securities strategist Naka Matsuzawa analyzed in a forward-looking research report released Tuesday, May 12, that the focus of Bessent’s visit is mainly on the risk that excessive volatility in Japanese bonds and the yen market could spill over into global financial markets.

Matsuzawa believes Bessent places maintaining the stability of Japanese government bonds above curbing yen depreciation. Currently, the yield on 10-year Japanese government bonds has rapidly surpassed 2.50%—the upper limit of the Bank of Japan’s estimated neutral interest rate range—and the risk of policy mistakes is rising.

This judgment has a direct impact on the market: if the Japanese government bond market continues to be turbulent, overseas funds previously attracted by high yields (steepening yield curve) will face withdrawal pressure, which will further depress the yen, creating a negative feedback loop of “unstable bond market—weak yen.”

Japanese Government Bond Stability Is Bessent’s Core Concern During His Visit to Japan

Matsuzawa clearly pointed out in the report that although Bessent may support Japanese authorities in intervening in the foreign exchange market to curb yen depreciation, the root of the problem goes beyond this. The instability of the Japanese government bond market and the renewed weakening of the yen are essentially two sides of the same coin.

Currently, the yield on 10-year Japanese government bonds has quickly surpassed the critical support level of 2.50%, which exactly matches the upper bound of the Bank of Japan’s estimated neutral interest rate range. With high oil prices as a backdrop, the cost of maintaining reflation policies is increasing. Matsuzawa believes that Bessent is concerned not only about whether the Bank of Japan is falling behind the curve, but also whether the Japanese government’s fiscal expansion is excessive.

From a technical perspective, the 10-year yield has easily broken above the 2.50% support level, and downside potential is hard to assess. The rise of the 30-year Japanese government bond yield is mainly driven by increased inflation expectations and expanding term premiums, rather than deterioration in spot supply and demand — the 30-year bond is appearing relatively expensive compared to interest rate swaps.

Additionally, the market is now pricing in a 73% probability of a Bank of Japan rate hike in June, but Matsuzawa points out that unless the situation in the Middle East stabilizes and the Bank of Japan clearly signals a rate hike, it will be difficult for this probability to rise further.

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The above highlights are from Chasing Wind Trading Desk.

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