Japan¡¯s bond market will largely take in its stride any normalization steps by the central bank this year, according to a former finance ministry official known for his key role in reforming the management of Japanese government bonds.

¡°Japanese long-term yields won¡¯t climb much beyond 1%, even if the Bank of Japan revises its yield curve control program or raises its short-term policy rate,¡± said Michio Saito, known as Mr. JGB, in an interview last week.

The demise of Japan¡¯s negative interest rate won¡¯t be followed by a series of aggressive hikes as seen in the United States and Europe, and that will keep a lid on 10-year yields, he added.

Saito¡¯s view suggests market players shouldn¡¯t be overly concerned by the prospect of the BOJ raising interest rates for the first time since 2007, a move that is widely expected by economists as inflation continues to hover well above 2%.

The yield already came close to breaching 1% in early November, a day after the central bank announced it would loosen its grip on bonds and step away from daily fixed-rate buying operations that had drawn a firm line in the sand at that mark.

Still, the dynamics of the bond market have changed since the Federal Reserve gave out signals it would likely start cutting U.S. interest rates in 2024. Given that Japan¡¯s 10-year bond yield is now below 0.6%, a jump into the lower 1% range could still signify a doubling of the rate.

The key point is that yields won¡¯t keep shooting up after the initial jump as the central bank will still be offering support for the economy, Saito said.

¡°A single decision by the BOJ won¡¯t likely have a major impact on the market,¡± said Saito, now an executive fellow at Nomura Institute of Capital Markets Research. ¡°The environment will still probably remain substantially accommodative even if it takes steps in a tightening direction.¡±

While higher yields could trigger valuation losses on the bond holdings of financial institutions, a rise in short-term interest rates would enable them to raise rates on loans, enabling them to improve their lending margins if they can push their own rates, he said.

Saito said the BOJ could achieve its stable inflation target this year, but not exactly in the way the central bank envisaged.

¡°Rather than strong demand pulling up wages and prices through a virtuous cycle, the chronic labor shortage will be the main factor,¡± he said.