Yen carry trade scale may continue to rise, equity-bond rebalancing may suppress US Treasury yields, domestic production orders slow while export orders expand --- 0521 Macro Insights

Although the Bank of Japan has started gradually raising interest rates since the second half of 2024, the interest rate differential between the US and Japan remains higher than the level before 2022, so the appeal of the yen as a funding currency has not disappeared. The depreciation of the yen and continuous growth in net outward direct investment may prompt the overall carry trade volume to rise further.

The stock-bond rebalancing mechanism helps to restore demand for US Treasuries. It is highly likely that Trump will curb any further rise in yields through policy adjustment or expectation management. If core economic data weakens and energy inflation fails to spread to core inflation, the room for yields to continue rising will be limited.

In May, domestic production and order growth slowed, and the export order index fell to 50.3 but remained in expansionary territory. The employment index declined for the second consecutive month to 50.4, indicating a tightening labor market. Cost pressures eased, and the purchase price index fell sharply.