Japan 10-Year Yield Hits Fresh 17-Year High

Japan’s 10-year government bond yield was little changed around 2.25% on Tuesday after the latest auction showed softer demand, as investors remained cautious ahead of the upcoming snap election. The sale of 10-year bonds produced an average yield of 2.249%, sharply higher than the 2.095% recorded at the previous auction. The bid-to-cover ratio stood at 3.02, below both last month’s level and the 12-month average, signaling more subdued demand. Market attention is focused on this weekend's snap lower house election, where PM Takaichi’s ruling party is expected to gain seats and pursue expansionary fiscal policies. Japanese bonds and the yen came under pressure last month amid expectations of fiscal stimulus, with potential tax cuts likely to add strain to already stretched public finances. Meanwhile, a summary of opinions from the BOJ’s January meeting showed growing concern over the inflationary impact of a weak yen, potentially opening the door to a near-term rate hike.

Japan’s 10-year government bond yield steadied around 2.25% on Tuesday as investors prepared for the Feb. 8 snap lower house election, where Prime Minister Sanae Takaichi’s ruling party is expected to gain seats and push for expansionary fiscal policies. Japanese government bonds and the yen had come under pressure last month amid bets on fiscal stimulus, with talks of tax cuts expected to further strain already stretched government finances. Meanwhile, a summary of opinions from the Bank of Japan’s January meeting highlighted growing concern over the need to raise interest rates in a timely fashion, as members monitored the impact of a weak yen on inflation. The summary suggests the possibility of a faster pace of rate hikes than the market consensus of roughly one move every six months following December’s increase.

Japan’s 10-year government bond yield edged down to around 2.24% on Friday after strong demand at recent auctions of super long- and short-term bonds helped ease concerns about investor appetite for local debt amid a deteriorating fiscal outlook. The sale of 40-year bonds on Wednesday attracted the highest demand since March last year, while a 2-year bond auction also saw demand exceed its 12-month average, as elevated yields drew in investors. The latest auctions signaled stabilizing market sentiment following a historic bond selloff earlier this month, which was triggered by Prime Minister Sanae Takaichi’s proposal to suspend the sales tax on food for two years. Investors also continued to assess the political outlook ahead of the Feb. 8 snap election for the lower house. Meanwhile, minutes from the Bank of Japan’s December policy meeting showed that board members favored continuing rate hikes, provided that economic activity and price trends evolve in line with the bank’s forecasts.