Japan 10Y Yield Tracks Treasury Yields Higher

Japan’s 10-year government bond yield climbed to around 2.93% on Thursday, recovering from two-week lows and tracking a rise in US Treasury yields amid disappointment over the US Treasury Department’s bond buyback announcement. JGBs and Treasurys typically move in tandem. Rising oil prices amid the escalating US-Iran conflict also heightened inflation and interest rate hike concerns, lifting global bond yields. Domestically, the Bank of Japan is widely expected to raise its policy rate to 1.25% next week, the highest level in roughly 31 years, following a rate increase in June. The BOJ aims to address the risk of inflation exceeding expectations amid higher crude oil prices and a weaker yen. The Takaichi administration has also taken a more hawkish stance, as policymakers recognize the need to curb excessive yen weakness.

Japan’s 10-year government bond yield fell to around 2.88% on Wednesday, extending its retreat from 30-year highs as the yen rallied further to reach a near 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 next week, 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, private data showed sentiment among manufacturers in Japan improved for the second straight month in September, supported by solid semiconductor and data centre demand.

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.