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Japan’s 10-year bond yield has hit a three-decade high, approaching the closely watched 3 per cent level as a weak yen fuels inflation concerns and investors bet on an interest rate rise next month.
The benchmark 10-year government bond yield touched 2.93 per cent on Monday, reaching its highest point since 1996. Bond yields move inversely to prices.
Traders and analysts said the rising yield reflected investors’ belief that inflation would accelerate because of a weak yen and high oil prices from the war in Iran. Investors were also pricing in the assumption that the Bank of Japan would raise interest rates in September.
Shoki Omori, an analyst at Deutsche Bank, said 3 per cent was “a critical defence line for fiscal credibility” because it was the assumed interest rate in the government budget.
Hitting the 3 per cent level “would signify an interest rate rise unforeseen by the government”, he said.
Junichi Makino, chief economist at SMBC Nikko, said: “The rise in inflation expectations [to near 2 per cent] appears to reflect recent weakness in the yen.”
He added that the yield could decline to the 2 per cent range if inflation expectations fell back towards the BoJ’s estimate for underlying inflation of about 1.2 per cent.
The yen has continued to weaken despite a series of co-ordinated interventions at the end of last month by the US and Japan, giving up half of the gains it had made.
After appreciating sharply from a 40-year low of ¥164 to the dollar to almost ¥155, it has weakened again to trade at about ¥159.
The gain in the 10-year yield also came as Japan’s economic growth slowed unexpectedly in the three months to the end of June, which could complicate the BoJ’s looming rate decision.
Real GDP grew 1.1 per cent on an annualised basis in the second quarter, according to data released on Monday, well below the 2 per cent expected by economists.
“Private consumption and capex declined, highlighting the weakness of private-sector domestic demand,” said Goldman Sachs analysts.
A majority of investors still expect the BoJ to raise interest rates to 1.25 per cent in September and are increasingly betting that the central bank will accelerate the pace of increases, according to LSEG data.
