Japan’s benchmark bond yield hit the 3% level for the first time since September 1996 on Tuesday, highlighting how inflation, fiscal concerns and shifting monetary policy are reshaping a market long defined by low interest rates.
With the Middle East crisis stoking inflation fears globally and pressure on the Bank of Japan to accelerate rate hikes, yields have jumped to historic levels across the Japanese government bond curve.
The 10-year JGB yield has more than tripled in two years.
On the shorter end, the five-year rate is at a record high, and the two-year yield is at a 31-year peak as markets priced in a near certainty that the Bank of Japan will raise interest rates at its meeting this month.
Inflationary pressures and the yen, languishing near a four-decade low, have put pressure on the BOJ to accelerate rate hikes.
The central bank has faced criticism at home and abroad for being “behind the curve” in normalising monetary policy, including a gradual drawdown of its massive JGB holdings.
Japan’s bond selloff has drawn attention because the country’s heavy debt burden makes it especially vulnerable to rising borrowing costs. Demand at a 10-year JGB auction in August was the weakest in a year.
Prime Minister Sanae Takaichi has pushed an investment-led growth path targeting strategic industries since taking office in October.
That spending, along with planned tax cuts, has stoked concerns that Japan could worsen its precarious financial position, with debt exceeding 200% of gross domestic product.
Japan is not alone in seeing stress in its bond market.
With no end in sight to the US-Iran conflict and elevated oil prices, bond yields across the United States, Germany, and France jumped to multi-year highs amid rising inflation expectations and central bank tightening.
Reporting with Reuters