Bond Yield Climbs to Highest Since 1996
Japan's benchmark 10-year government bond yield climbed to its highest level in nearly three decades on Tuesday, pressured by rising global bond yields and growing expectations that the Bank of Japan could raise interest rates as early as September. The 10-year yield rose 2.5 basis points to 2.945% in early trading, its highest level since September 1996, according to Reuters, as cited by The Economic Times. Bond yields move inversely to prices, meaning the rise reflected renewed selling pressure in the government bond market. Benchmark 10-year JGB futures fell 0.19 yen to 125.97 yen.
The rise in Japanese bond yields comes amid a broader increase in global borrowing costs as investors reassess the inflation outlook. Reuters reported, via The Economic Times, that higher oil prices and a lack of progress in Middle East peace talks have heightened concerns over renewed inflationary pressures. Higher energy costs could make it more difficult for major central banks to ease monetary policy, with investors also watching the potential impact of elevated oil prices on economic growth and inflation expectations.
BOJ Rate Hike Expectations Strengthen
Domestic factors are adding to pressure on Japanese government bonds, with market participants increasingly anticipating another interest-rate increase by the Bank of Japan at its September policy meeting. Recent comments from BOJ officials have taken on a more hawkish tone, strengthening expectations that the central bank could accelerate the pace of monetary tightening, as reported by Reuters per The Economic Times. Reports have also indicated that some members of the BOJ policy board may support more aggressive tightening than the central bank has pursued so far. The prospect of higher policy rates has pushed investors to demand greater returns on longer-dated Japanese government debt, contributing to the rise in benchmark yields.
Key Officials Set to Speak
Bank of Japan officials will soon have several opportunities to validate — or push back against — increasingly aggressive market bets, starting with a key speech on Thursday, as reported by Livemint. Deputy Governor Ryozo Himino kicks off a series of public appearances by top BOJ officials before the next policy decision on September 18. Governor Kazuo Ueda, who probably won’t speak at this week’s gathering of officials in Jackson Hole, is likely to follow Himino with a press briefing after a Group of 20 gathering in the US next week.
As of late Friday, pricing in the overnight-index swaps market implied a roughly 82% probability of a hike in September, more than tripling from about 23% immediately before the BOJ’s July policy meeting. Ueda has emphasized thorough communications with the markets ever since he was heavily criticized for a decision to hike rates in July 2024 that appeared to catch some traders off guard, according to Livemint.
The yen is another critical factor compelling the BOJ to telegraph its intentions. If the BOJ decides to hold policy settings at a time when the market is betting on a hike, there’s a risk Japan’s currency would fall steeply as traders scramble to unwind their positions. Having learned its lesson after the July 2024 move, which helped precipitate a global stock market meltdown, the BOJ clearly prepared markets ahead of each of its past three rate increases, Livemint reported.
Market Watchers: Expect Signals on Inflation
“The BOJ probably won’t explicitly say the next hike will come in September,” said Kento (Kento) Minami, senior economist at Daiwa Securities, as carried by Livemint. “Instead, officials are likely to indicate the need for an early hike by emphasizing upside inflation risks. Markets will take that as a nod for September.”
Bets on a September move surged after the US and Japan conducted a rare coordinated currency intervention late last month, according to Livemint. The yen is hovering near the psychologically important 160-per-dollar mark, and the BOJ has limited room to sound dovish without risking renewed depreciation. The intervention pulled the yen back from levels close to its weakest in about four decades, the report said.
Central Bank Officials' Appearances
Livemint also noted that board member Hajime Takata speaks on September 2; he was the sole dissenter at the last meeting, voting for a hike. Board member Kazuyuki Masu speaks on September 10; his remarks before the June meeting strengthened speculation about the rate increase that followed. Governor Ueda and Prime Minister Sanae Takaichi have met three times, most recently on May 22.
Japan and the US conducted their first coordinated currency intervention since 1998 after the BOJ’s July meeting. Treasury Secretary Scott Bessent, quoted by Livemint, said policy would need to follow up on the intervention and that he was “highly confident” that would happen. He said he has known Governor Ueda for 15 years and trusts the governor to do what is needed.