Japan 10Y Yield Slips as Yen Strengthens

Japan’s 10-year government bond yield fell to around 2.89% on Tuesday, extending its retreat from 30-year highs as the yen extended gains to reach a seven-month high, easing inflationary pressures in the country. A stronger yen generally lowers the cost of imports, which can contribute to softer inflation. The currency’s rally was driven by the unwinding of carry trades, expectations of capital repatriation and growing US political pressure for Japan to support the yen through tighter monetary policy. Markets expect the Bank of Japan to raise interest rates this month, with an economic adviser to Prime Minister Sanae Takaichi saying the central bank is likely to hike rates in September and deliver another increase by January next year. Meanwhile, data showed Japanese wages rose at their fastest pace since 1997, while second-quarter GDP growth was revised higher, strengthening expectations for a more hawkish BOJ policy stance.

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.