Japan’s Benchmark Bond Yield Hits Decade-High on Rate-Hike Bets

(Bloomberg) -- Japan’s benchmark government bond yield climbed to the highest since 2013 on bets the central bank will further raise interest rates to support the struggling yen.

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The yield on 10-year government debt rose 2.5 basis points to 0.975% on Monday, a level last seen when the then newly appointed Bank of Japan Governor Haruhiko Kuroda was starting his radical monetary easing.

Now under his successor Kazuo Ueda, the yield is edging toward the closely watched 1% mark, as BOJ officials signal they’re ready to push up borrowing costs if workers get higher wages that lessen the burden of inflation. That’s far cry from the deeply negative yields seen as recently as 2020, when falling prices weighed on corporate earnings and prompted consumers to put off purchases in hopes that things would get cheaper.

Yields on debt due in 20 years to 30 years have also climbed to decade highs, raising expectations that Japanese long-term investors will put more of their funds into domestic debt rather than markets in the US and Europe.

“The 10-year yield has risen gradually on the back of view that the BOJ will lift interest rates sooner and cut bond-purchase amounts at its operations,” said Naoya Hasegawa, chief bond strategist at Okasan Securities Co. in Tokyo. There may be a little more buying interest for this maturity around the 1% level but selling pressure at the long end of the yield curve is set to continue, according to Hasegawa.

Investors are scouring data and policymaker statements to try to predict the BOJ’s next move. Pacific Investment Management Co. sees the prospect of three more moves this year. Vanguard Group Inc.’s head of international rates Ales Koutny expects hikes to around 0.75% by the end of the year.

In contrast to the views of Pimco and Vanguard, AllianceBernstein Holding LP said last week that the BOJ is likely to favor reducing its vast balance sheet over increasing interest rates.

This matters for the currency market because the huge gap in yields between Japan and the rest of the world has driven the yen to a 34-year low against the dollar. Even after Japan’s 10-year yield has risen, its US counterpart is still about 3.4 percentage points higher, though it’s come down from more than 4.1 points.

The yen was down 0.1% versus the dollar at 155.74 as of 3:32 p.m. in Tokyo.

Ueda told Prime Minister Fumio Kishida earlier this month that he’s watching the yen’s the impact on prices. He’s said in parliament that “a monetary policy response might be needed.”

See also: Western Asset Betting BOJ Policy Shift to Boost Ultra-Long Bonds

“Touching 1%, or even going above 1% is a matter of time unless US data comes out weak and US rates goes lower with speed,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. in Tokyo.

Japan’s inflation has been above the central bank’s target of 2% every month since April 2022. Reflecting this, an auction of 10-year inflation-indexed bonds saw the highest bid-to-cover ratio since August 2007 on Monday.

Meanwhile, the market for overnight indexed swaps is pricing about a 57% chance that the BOJ will lift rates by July, compared with around 50% odds at the start of May.

Goldman Sachs Group Inc. strategists now predict Japan’s 10-year sovereign yield to rise to 2% by the end of 2026 on expectations the central bank will deliver a “prolonged” tightening cycle. They expect the BOJ to raise interest rates to 1.25%-1.50% by 2027, according to a note dated Friday from George Cole and Bill Zu.

“We think this rise in nominal yields will be led by rising inflation expectations and real rates will be relatively contained,” they wrote. Still, “real rates in Japan are unlikely to fall from current levels given the likelihood of hikes in response to higher inflationary pressure from here.”

--With assistance from Matthew Burgess and David Finnerty.

(Adds context in third paragraph, updates prices.)

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