The Japanese yen rose during trading on Tuesday, after the 20-year Japanese government bond auction recorded a record demand, at a time when the markets are awaiting the Bank of Japan’s directions regarding interest rates, amid expectations of the possibility of raising its inflation estimates during the next fiscal year, while keeping monetary policy unchanged at its upcoming meeting at the end of the month.
In the currency markets, the yen rose by 0.2 percent to 158.15 yen against the US dollar, ending a series of losses that lasted two days, after subscription requests in the 20-year Japanese government bond auction reached about 5.84 times the size of the bonds offered, compared to 4.01 times in the previous auction last month.
Masahiko Lo, chief fixed income strategist at State Street Investment Management in Tokyo, said that record demand for 20-year bonds represents a strong signal that liquidity that was outside the market is returning.
He added that Japanese bonds are beginning to look like a relatively safe haven compared to European assets, in light of the political and financial fluctuations, especially in France.
The Bank of Japan may raise inflation expectations
In the context of monetary policy, the Bank of Japan may slightly raise its expectations for core inflation during the fiscal year 2027, in light of the continued impact of rising crude oil prices on domestic prices for a longer period than expected, according to four sources familiar with the bank’s directions.
The bank is expected to keep interest rates unchanged at its two-day meeting ending on October 30, unless the yen witnesses a new decline that leads to higher import costs and escalating inflationary pressures.
However, the bank is likely to confirm in its upcoming quarterly report the continued upside risks to inflation, leaving the way open for a new rate hike in December, according to the sources.
One source said that consumer price growth may remain high for longer than expected, although there has been no significant change in the underlying trend in inflation, which was supported by two other sources.
Another source added that inflationary pressures still exist, but have not increased significantly to require a rush to raise interest rates.
The bank had expected in July that core consumer price inflation would reach 2.5 percent during the current fiscal year, which ends in March 2027, before slowing to 2.4 percent in the following fiscal year.
The bank may revise its core inflation forecast for 2027 slightly upward, to reflect the transmission of the impact of the recent rise in crude oil prices to domestic prices. But the sources indicated that any adjustments would be minor, in the absence of strong indications that indirect inflationary effects are taking hold, represented by the energy shock entering a spiral of sharp rises in wages and prices.
The bank is likely to keep its economic growth forecast at 0.6 percent for fiscal 2026 and 0.8 percent for 2027, with strong exports of AI-related goods offsetting weak domestic consumption.
The new estimates are also not expected to include the potential impact of reducing the consumption tax on food for two years, scheduled to begin next April, given that the draft law necessary to implement the step has not yet been approved in Parliament.
Interest rates are at a 31-year high
The Bank of Japan raised the key interest rate last month to 1.25 percent, the highest level in 31 years, indicating a move towards a phase focused on containing the risks of core inflation exceeding its target of 2 percent.
Bank Governor Kazuo Ueda warned of the possibility of core inflation exceeding the target, in light of pressures resulting from the conflict in the Middle East, the weak yen, and strong demand related to artificial intelligence.
The bank is expected to emphasize in its next report the importance of stabilizing inflation expectations around the target level, while maintaining its assessment that financial conditions remain accommodative, which indicates continued scope for further increases in interest rates.
However, recent data do not indicate an escalation in inflation risks to the extent that would require raising interest rates in two consecutive meetings. Analysts believe that wages will continue to rise over the next year, but it is unlikely to record a significant jump, in light of the contribution of government fuel subsidies in limiting the pace of rise in consumer prices this year.
The “Tankan” survey conducted by the Bank of Japan, the results of which were published on October 1, showed that companies’ inflation expectations remained high, but they did not accelerate compared to their levels 3 months ago.
Many analysts polled by Reuters expect the bank to raise the interest rate twice, to reach 1.75 percent by next June, while expectations for the final level of interest are centered between 1.75 and 2 percent.
Long-term bond yields are falling
In the bond market, long-term Japanese government bond yields fell strongly during Tuesday's trading, after the 20-year bond auction recorded the strongest demand since the start of offering these bonds in 1987.
The yield on 20-year bonds fell by as much as 6 basis points to 3.71 percent, the lowest level since September 9, before recording a decline of 4.5 basis points to 3.725 percent.
Bond yields move inversely with their prices, which means that a decline in yields reflects an increase in bond prices.
Takashi Fujiwara, senior fund manager at Resona Asset Management, said that growing expectations that the Bank of Japan will end the cycle of raising interest rates as early as next March support very long-term bonds.
He added that there is a belief that expected inflation will remain stable, which will reduce the bank's need to raise interest rates at a sharp pace.
For his part, Katsutoshi Inadomi, chief strategist at Sumitomo Mitsui Trust Asset Management, said that the strong auction results indicate the expectations of many investors for a recovery in the bond market, as they move towards safer assets following the widespread protests in France and the sales of Core Wave shares and bonds.
The yield on 30-year Japanese bonds fell by 5 basis points to 3.935 percent, while the yield on 40-year bonds fell by 6 basis points to 4.05 percent. In contrast, the benchmark 10-year bond yield rose 1.5 basis points to 2.920 percent.
The British labor market recorded limited signs of recovery, with the pace of wage growth rising again and an increase in the number of employees registered on the payroll during September, in data that may strengthen the justification for the Bank of England raising interest rates next month, at a time when the bank is awaiting indications that the shock of rising energy prices resulting from the war with Iran will transfer to broader inflationary pressures.
The British Office for National Statistics announced, on Tuesday, that average weekly wages, excluding bonuses, rose by 3.7 percent during the three months ending in August, compared to the same period in 2025, continuing its gradual recovery after recording its lowest level at 3.4 percent earlier in the year.
A Reuters poll of economists indicated that wages were expected to grow at a lower rate of 3.6 percent. The reading for the three months ending in July was also revised slightly upward, showing wages rising by 3.6 percent.
In the private sector, the pace of wage growth also accelerated slightly, reaching 3 percent, compared to 2.9 percent previously.
Indicators of labor market resilience
Preliminary data issued by the British Tax Authority showed that the number of employees registered on the payroll increased by 13,000 in September. August data was also revised to show an increase of 1,000 employees, compared to the initial estimate that indicated a decrease in the number by 26,000.
Jack Kennedy, chief economist at the employment site Indeed, said that the latest data indicates a resilient labor market, reflecting the better-than-expected performance of the economy in general.
But he pointed out that the possibility of a stronger recovery depends on the first budget presented by British Finance Minister John Healy next week.
His predecessor, Rachel Reeves, had raised a tax on employers in 2025, followed by a decline in hiring.
Kennedy said that the data confirms that the labor market is still at a standstill, adding that the question is whether the budget will give employers a reason to resume hiring.
In a related context, the unemployment rate in Britain fell to 4.7 percent during the three months ending in August, which is its lowest level since mid-2025, according to data based on a survey that the National Statistics Office is developing. The British pound rose against the US dollar following the release of the data.
Declining job vacancies raise concerns
Despite the limited improvement in wage and employment growth, data showed continued weak demand for labor, as the number of job vacancies decreased during the three months ending in September to 691 thousand jobs, compared to 704 thousand jobs in the three months ending in August.
This is the first time that the number of job vacancies has fallen below 700,000 since the three months ending in April 2021.
Chief Economist at the Institute of Chartered Accountants in England and Wales, Suren Thiru, said that the continued decline in job vacancies represents a clear warning signal about the labor market, noting that one of the negative side effects of economic growth driven by artificial intelligence this year may be weak demand for employment, along with rising labor costs.
Inflation determines the path of interest
The Bank of England is monitoring signs that the energy price shock resulting from the war with Iran is spilling over into broader inflationary pressures, including workers' demands for higher wages.
Investors expect the bank to raise the key interest rate to 4 percent during the Monetary Policy Committee meeting in November. So far, the bank has not followed the lead of the US Federal Reserve and the European Central Bank in raising borrowing costs.
The Governor of the Bank of England, Andrew Bailey, said last week that the continuation of the war for a longer period will make it more difficult for the Bank not to respond to its repercussions, but he also indicated that it is still too early to assess its effects, and that inflationary pressures are still relatively limited.
Official inflation data is scheduled to be released on Wednesday, amid expectations of economists polled by Reuters that the general consumer price inflation rate will rise to 3.4 percent in September, compared to 3.1 percent in August, moving further away from the bank’s target of 2 percent.
It is also expected that the basic indicators of inflation will rise during the same period, which may increase pressure on the bank in determining the course of interest rates in the coming months.
