Cheaper On Local Political Matters, But Off Worst Levels

JGB futures moved lower during the Tokyo morning, with domestic equities pushing higher in the wake of Japan’s ruling coalition tightening its grip on power in the weekend’s upper house elections, which will allow PM Kishida to continue to push forward his idea of modern capitalism, while participants also continue to speculate on the future shape of Japanese defence and monetary policy. Press reports noted that Kishida is set to conduct a cabinet reshuffle in August or September, with subsequent comments from Kishida pointing to a reshuffle that will focus on party unity. He also noted that there will be lively debate on constitutional changes in the Autumn, while flagging imminent talks on fiscal measures to combat inflation (which will seemingly be based on “flexible” use of the country’s budget reserves).

• This mix of domestic political matters, coupled with wider weakness in global core fixed income markets in the wake of Friday’s U.S. NFP print, has allowed the space to cheapen.
• Elsewhere, comments from BoJ Governor Kuroda reaffirmed the Bank’s stance, while the latest Sakura report saw the BoJ upgrade its assessment of 9 areas of the country, while the other 2 saw their assessment remain as was.
• Futures last deal -28, off worst levels of the session as the wider equity sphere comes under some pressure (although the Nikkei 225 outperforms post-elections, last +1.2%, albeit shy of best levels). Cash JGBs are little changed to ~4bp cheaper across the curve, bear steepening (although 7s were softer than directly surrounding lines on the weakness in futures). Note that the 10-Year JGB yield was limited by the upper boundary of the BoJ’s permitted -/+0.25% trading band during the Tokyo morning. Swaps out to 10s were generally wider on the day (excluding 7s given the futures-related weakness), while 20+-Year swap spreads were narrower on the day.
• Looking ahead, PPI data and 5-Year JGB supply headline Tuesday’s domestic docket.