Japan 10-Year Yield Falls as Inflation Slows

Japan’s 10-year government bond yield declined toward 2.1% on Friday, hitting a six-week low as both headline and core inflation eased in January amid government measures to relieve cost-of-living pressures. Headline inflation dropped to 1.5% from 2.1%, the lowest since March 2022, while core inflation matched the Bank of Japan’s 2% target, marking the slowest pace in two years. The data gives the central bank additional time before considering interest rate hikes, particularly amid a tepid economic rebound last quarter. Meanwhile, Prime Minister Sanae Takaichi is set to open the new parliamentary session by outlining plans to boost strategic investment, pursue “active but responsible” fiscal policies, and advance assertive diplomacy. Elsewhere, the latest 20-year JGB auction drew weaker demand than the 12-month average, as lower yields tempered investor interest.

Japan’s 10-year government bond yield held steady around 2.15% on Thursday, hovering near six-week lows, after the latest 20-year JGB auction drew weaker demand than the 12-month average, as lower yields tempered investor interest. The 20-year yield hovered near 2.98%, down from an almost three-decade high of 3.46% reached last month. Yields surged in January after Prime Minister Sanae Takaichi proposed a two-year cut to the sales tax on food, raising concerns about the fiscal outlook. They later retreated following Takaichi’s landslide election victory, which eased political uncertainty and bolstered expectations that her fiscal expansion plans could support economic growth. Separately, data showed Japan’s machinery orders jumped in December after a November slump, driven by one-off large bookings from refineries and nuclear fuel producers.

Japan’s 10-year government bond yield inched up to 2.14% but remained near an over one-month low, amid easing fiscal concerns. Good results from Tuesday’s five-year bond sale encouraged investors to increase long positions, adding downward pressure on yields. Top fund manager Mark Nash purchased 10-year JGBs after closing a long-standing short position, citing reduced political risk after Sanae Takaichi's landslide victory. Earlier this week, BOJ Governor Kazuo Ueda said that PM Takaichi made no specific requests during their regular meeting, reassuring investors that the government is unlikely to interfere with the central bank’s policy normalization plans. Meanwhile, the IMF urged the BOJ to continue raising rates and called on the government to avoid further fiscal loosening. In economic news, Japan’s trade deficit narrowed in January amid a double-digit export growth and a decline in imports. Manufacturers’ sentiment also rebounded in February.