Core Viewpoint - The breakup of Japan's ruling coalition raises uncertainty regarding the political landscape and economic outlook, particularly concerning the premiership bid of Sanae Takaichi, the new hardline leader of the Liberal Democratic Party [1] Market Reaction - The yen strengthened by up to 0.5% to 152.38 per dollar following the coalition split, although it was last trading at 152.73 [2] - The yield on the two-year Japanese government bond (JGB) decreased by 2 basis points to 0.905%, while the 30-year JGB yield increased by 5 basis points to 3.225% [2] Analyst Comments - Shoki Omori from Mizuho Securities indicated that if Takaichi fails to become Prime Minister and a pro-BOJ tightening candidate emerges, the market may start to price in the risk of a reversal, potentially pushing USD/JPY down, although the yen is expected to remain a funding/carry currency [2][3] - Bart Wakabayashi from State Street noted that aggressive selling of the yen occurred based on Takaichi's campaign, and the market will react if there is no consensus on her approval as Prime Minister [3] - Naka Matsuzawa from Nomura Securities mentioned that the immediate market reaction involves unwinding Takaichi trades, with two potential scenarios: the LDP retaining a solo cabinet or forming a coalition with the DPP, which could lead to a resurgence of Takaichi trades if fiscal expansion is supported [4]

Core Viewpoint - The Bank of Japan is likely to delay its interest rate hike plans for this year due to uncertainties surrounding U.S. tariff policies, with economists predicting the next rate increase will occur in the first quarter of 2026, with a potential increase of 25 basis points [1][2]. Group 1: Interest Rate Predictions - A slight majority of economists (52%) expect that the Bank of Japan will maintain borrowing costs at 0.50% by the end of this year, a shift from previous expectations of a rise to 0.75% [1]. - Over three-quarters of respondents (40 out of 51) predict at least one rate hike by the end of March next year, with 37% forecasting the next hike in January 2025 [2]. - The interest rate futures market currently reflects an expectation of approximately 17 basis points of rate increases within this year [1]. Group 2: Government Bond Purchases - A majority of economists (17 out of 31) believe that the Bank of Japan will slow down its current quarterly reduction of approximately 4 trillion yen in government bond purchases after April next year [2][3]. - The Bank of Japan still holds about half of the outstanding Japanese Government Bonds (JGB), but has begun to reduce its purchases to move away from decades of large-scale stimulus [3]. Group 3: Long-term Bond Issuance - 75% of economists (21 out of 28) anticipate that the government will reduce the issuance of ultra-long-term bonds, with concerns over rising debt levels and declining demand from traditional buyers [3]. - The government is reportedly considering repurchasing some ultra-long-term bonds issued during low-interest periods and plans to cut the issuance of these bonds in response to rapidly rising yields [3][4].