Japan Rates Weekly: BoJ remains hawkish but rate hike expectations receding

The BoJ kept its policy rate unchanged this week but maintained a hawkish stance, stating that underlying CPI inflation is generally consistent with the 2% price stability target with risks skewed to the upside, and revised up its core-core inflation forecast to 2.7% for FY2027 and 2.3% for FY2028. Hajime Takata dissented and proposed a hike to 1.5%, and the Bank decided to accelerate ETF selling from ¥330bn to ¥860bn per year from January. Citi expects the next hike in December, followed by hikes in March and July 2027 toward 2%, with current market pricing slightly low but requiring a recovery in risk sentiment to be fully priced. With the 10y JGB yield below 2.8%, which looks somewhat low if hikes toward 2% continue, the team is bearish into the 10y auction, considering selling 10y hedged with risk reversals, a steeper 5s10s, paying the belly of the 5s10s20s butterfly and buying gamma. Separately, private-sector participation in the $550bn US investment and the ¥370trn growth strate