Japan 10Y Yield Steadies on Hawkish BOJ Bets

Japan’s 10-year government bond yield steadied around 2.91% on Monday, ending a two-day decline as expectations grew that the Bank of Japan could raise interest rates this month. Takuji Aida, an economic adviser to Prime Minister Sanae Takaichi, said the BOJ is likely to hike rates in September and deliver another increase by January next year. The comments point to a growing recognition within the Takaichi administration, which has previously favored a dovish stance, that additional BOJ tightening may be needed to curb excessive yen weakness. Japanese bond yields have also climbed this year amid concerns that government spending could rise under Takaichi’s expansionary fiscal policy. Meanwhile, an unusual meeting of the management team at Japan’s Government Pension Investment Fund has fueled speculation that the $2 trillion investor could raise its target allocation to domestic bonds.

Japan’s 10-year government bond yield fell to around 2.9% on Friday, declining for a second consecutive session and moving further away from its highest levels since 1996 as the global bond selloff eased. A successful sale of 30-year Japanese government bonds this week also eased market concerns and indicated that investment demand remains firm, with domestic pension funds seeking to increase their JGB allocations in anticipation that the Bank of Japan will accelerate its rate-hiking cycle. Those expectations were reinforced by hawkish remarks from BOJ officials and mounting pressure from the US to support the yen through tighter monetary policy. BOJ board member Hajime Takata raised the possibility of outsized or back-to-back rate hikes, while Governor Kazuo Ueda said policymakers need to pay closer attention to upside price risks. The BOJ is expected to deliver a quarter-point rate hike this month, followed by another increase in December.

Japan’s 10-year government bond yield fell to around 2.96% on Thursday, pulling back from its highest levels since 1996 as a successful sale of 30-year government bonds eased market concerns after a sharp selloff in bond markets this week. Japanese bond yields also tracked US Treasury yields lower, while oil prices halted their rally after President Donald Trump said the latest attacks on Iran would be short-lived, easing inflation concerns. Additionally, a sharp rally in the yen reduced pressure on the Bank of Japan to tighten policy aggressively. However, BOJ board member Hajime Takata on Wednesday raised the possibility of outsized or back-to-back interest rate hikes to curb rising inflationary pressures. BOJ Governor Kazuo Ueda also said Tuesday that policymakers need to pay greater attention to upside price risks when conducting monetary policy, signaling that an interest rate hike is likely later this month.