In a significant market shift, the yield on Japan's 10-year government bond (JGB) climbed past the 1.5% threshold for the first time since June 2009. The 30-year bond yield similarly leapt, crossing the 2.5% mark for the first time since 2008. This surge in yields is largely attributed to a sharp rise in European government bond yields and remarks from Bank of Japan (BOJ) Deputy Governor Shinichi Uchida, which fueled investor sell-offs.
Deputy Governor Uchida's comments, indicating that the central bank would continue tapering its government bond purchases despite rising yields, added to market concerns. These developments come as Japan grapples with a higher inflation rate, which is stoking expectations of further rate hikes by the BOJ and consequently pushing bond yields upward.
Japan's headline inflation has exceeded the BOJ's 2% target for 34 consecutive months, with January's figures marking a two-year high of 4%. Notably, the "core-core" inflation rate, excluding fresh food and energy prices, rose to 2.5% in January, reaching its highest level since March 2024.
The JGB market faces additional pressure as the supply-demand dynamic remains unfavorable. Japanese banks have adopted a cautious stance, limiting their risk appetite ahead of the financial year's end in March. Contributing to the bearish sentiment, the BOJ announced plans to slash its JGB purchases by approximately 400 billion yen each calendar quarter.
The global bond market is also exerting upward pressure on Japanese yields. As Yujiro Goto, Nomura's head of FX strategy for Japan, notes:
"Investors now expect the EU and German government to increase fiscal spending, which is adding upward pressure on global bond yields." – Yujiro Goto, Nomura head of FX strategy for Japan
Mitul Kotecha, head of Asia FX and rate strategy at Barclays, highlighted the impact of inflationary pressures on yields:
"A lot of people [are] saying that the real inflation is even higher than what the actual measures are showing. So I think part of that is the inflation move that is pushing yields higher." – Mitul Kotecha, head of Asia FX and rate strategy at Barclays