Morgan Stanley Projects Decline in Japanese Government Bond Yields

Morgan Stanley's interest rate strategists have projected a decline in the mid-section of the Japanese government bond yield curve as market focus shifts from inflation to economic growth. According to Jin10, the strategists expect the yield on the 10-year Japanese government bond to decrease to 2.1% by the fourth quarter of 2026. Currently, data from the London Stock Exchange Group shows this yield at 2.74%. The strategists noted that the long end of the yield curve is likely to lag due to a lack of demand from domestic investors. They also highlighted that the current market pricing implies a more hawkish Bank of Japan policy path compared to Morgan Stanley's probability-weighted policy path and survey-based forecasts, indicating a significant inflation risk premium in the market. "We expect this premium to dissipate by the fourth quarter of 2026, bringing the 10-year JGB yield down to 2.10%. Subsequently, as oil prices stabilize and the Bank of Japan resumes rate hikes, the yield is projected to gradually rise, reaching 2.30% by the fourth quarter of 2027," the strategists stated.