Japan’s benchmark 10-year government bond yield surged to a three-decade high on Thursday, as climbing oil prices reignited worries about inflation and investors grew increasingly uneasy about the country’s fiscal condition.
The 10-year Japanese Government Bond (JGB) yield climbed 1.5 basis points to reach 2.880% — the highest it has been since September 1996. Bond yields and bond prices move in opposite directions.
The two-year yield, which is the most closely tied to Bank of Japan policy rates, edged up 1 basis point to 1.44%, while the five-year yield also rose 1 basis point to 1.995%.
Oil prices jumped after U.S. President Donald Trump stated he believed a tentative agreement to bring the war with Iran to an end had collapsed, sending U.S. Treasury yields to their highest point in several weeks.
Japan’s finance ministry is scheduled to auction approximately 2.5 trillion yen — roughly $15.38 billion — in five-year notes later Thursday. An analyst at SMBC Nikko Securities, Lisa Mochizuki, noted that elevated yields and indications of demand, evidenced by a sharp narrowing in the negative five-year swap spread since late last month, should help support the sale.
JGB yields have been on the rise since the Japanese government unveiled broad spending plans in its policy blueprint last month. That blueprint called on the Bank of Japan to bring its monetary policy in line with the government’s growth objectives, sparking fears that officials could pressure the central bank to hold interest rates down — potentially leaving it behind the curve as inflation pressures continue to build.
A draft document obtained by Reuters also showed the Japanese government is weighing changes to the language on monetary policy within that economic blueprint.
Ataru Okumura, chief rate strategist at SMBC Nikko Securities, addressed the situation in a written note: “In the recent JGB market, yields have been rising on fiscal factors, but one of the biggest problems with fiscal expansion is that it increases inflation risks.”
(Exchange rate reference: $1 = 162.5500 yen)
