Japan Yields Hit Decade Highs as US Yields Rise, BOJ Tightening in Focus

Reuters

16:30 JST, May 20, 2024

TOKYO (Reuters) – Benchmark Japanese government bond yields climbed to the highest in more than a decade on Monday, helped by a rise in U.S. yields, and continuing a gradual grind higher amid expectations of tighter domestic monetary policy this year.

The 10-year JGB yield rose 3 basis points (bps) to 0.975%, a level not seen since May 2013, in the very early days of former Bank of Japan Governor Haruhiko Kuroda’s unprecedented policy-easing experiment.

The benchmark yield has climbed 25 bps since the end of March, when current BOJ Governor Kazuo Ueda lifted interest rates for the first time since 2007, amid growing speculation he will continue to phase out those policies in coming months.

Ueda suddenly adopted a more hawkish tone two weeks ago, as the weakest yen in 34 years risked derailing a virtuous cycle of mild inflation supporting higher wages.

The extent to which inflation expectations have jumped amid the currency’s slide was clear in Monday’s “way stronger than expected” auction of inflation-linked 10-year JGBs, said Shoki Omori, chief Japan desk strategist at Mizuho Securities.

“If inflation expectations are strong, rates expectations for nominal JGBs should increase as well,” Omori said. “JGB yields across the curve are going to increase, implying that the 10-year yield can go above 1% any time.”

JGB yields were also pulled higher by a climb in Treasury yields from Friday, as Federal Reserve officials sent cautious signals about the speed of U.S. rate cuts. The 10-year Treasury yield last stood around 4.412%.

The gaping U.S.-Japan yield differential has kept the yen depressed despite the opposing paths for monetary policy.

Following a meeting with Prime Minister Fumio Kishida on May 7, Ueda said the BOJ will be “vigilant” to yen moves in setting policy. A day later, he said the BOJ may raise rates if the currency’s drop affects prices significantly.

The central bank then surprised markets a week ago by cutting the amount of JGBs it offered to purchase in a regular buying operation, sparking bets that quantitative tightening may not be far off.

Superlong JGB yields marked fresh decade peaks on Monday, with the 20-year yield rising 2.5 bps to 1.780% for the first time since June 2013, and the 30-year yield climbing 3.5 bps to 2.085% for the first time since July 2011.

The five-year yield rose 2.5 bps to 0.570%, the highest since March 2011. The two-year yield added 1 bp to 0.34%.