Japan 10-Year Yield Falls as Inflation Slows

Japan’s 10-year government bond yield traded around 2.39% on Friday, remaining at an all-time high as markets weighed growing expectations for a Bank of Japan rate hike. Markets now assign a 71% probability of a BoJ interest rate hike, partly reflecting concerns about rising inflation from higher oil prices amid the ongoing Middle East conflict. US President Trump warned that new military action against Iran could occur within the next two to three weeks, even as he described the conflict as “very close” to completion and emphasized that diplomatic discussions continue. Japan, a major importer of Middle Eastern oil, has felt the impact sharply, with gasoline prices soaring to record levels in mid-March before easing slightly due to government subsidies. Meanwhile, newly appointed BoJ board member Toichiro Asada signaled a cautious, data-driven approach in his first briefing, highlighting the BoJ’s careful balancing act between supporting growth and curbing inflation.

Japan’s 10-year government bond yield fell to around 2.30% on Wednesday, marking its third straight session of decline and tracking US Treasury yields, as investors grew wary of the Middle East conflict’s impact on global growth. Now in its fifth week, the war has roiled markets and stoked fears of a simultaneous spike in inflation and economic slowdown. However, Fed Chair Powell said that longer-term inflation expectations remain well-contained, reducing the urgency for any monetary policy response from the Fed. Hopes of a possible de-escalation also emerged after President Trump said US forces would end operations in Iran within two to three weeks. Domestically, the Bank of Japan’s sentiment index for large manufacturers rose to 17 in Q1 2026, its highest level since late 2021, reflecting robust business confidence. Meanwhile, the Manufacturing PMI was revised up to 51.6 in March from a preliminary 51.4, though still down from February’s near four-year peak of 53.

Japan’s 10-year government bond yield fell to around 2.34% on Tuesday, sliding for a second consecutive session and tracking a decline in US Treasury yields amid dovish signals from the Federal Reserve. Fed Chair Jerome Powell said long-term US inflation expectations remain in check despite heightened Middle East uncertainties and noted that the central bank’s policy stance allows officials to assess the economic impact of the Iran war. Global bond yields also faced pressure from growing concerns over the economic fallout from the conflict, outweighing inflation risks from surging oil prices. Meanwhile, the Bank of Japan’s March meeting Summary of Opinions reflected a hawkish tilt among policymakers, with one member suggesting a potentially larger rate hike may be needed in response to Middle East tensions.