Japanese government bond yields experienced a significant increase, particularly the 40-year yield which rose by 10 basis points to approach 4.0%. This surge is primarily attributed to heightened global inflation concerns. The primary catalyst for these inflation fears is the ongoing escalation of tensions between the United States and Iran, which has driven oil prices higher, increasing the cost of energy globally.
The broader JGB market also saw substantial yield increases across the curve. For instance, the 20-year JGB yield climbed 3 basis points to 3.565%, while the 30-year yield added 4.5 basis points to reach 3.800%. Even shorter-term yields were affected, with the 2-year yield, sensitive to Bank of Japan policy, increasing 0.5 basis point to 1.435% and the 5-year yield rising 1.5 basis points to 1.950%. The benchmark 10-year JGB yield went up 0.5 basis point to 2.690%.
These movements are occurring amidst increasing expectations of inflation in Japan. A recent Bank of Japan survey revealed that over 90% of Japanese households anticipate price increases in the coming year, an uptick from three months prior. This suggests broadening inflationary pressures that could bolster the case for further interest rate hikes by the central bank.
Adding to market cautiousness are persistent worries about Japan's fiscal health and potential increases in government bond issuance. Despite these rising concerns, Prime Minister Sanae Takaichi stated she does not see a link between her government’s economic blueprint and the recent rout in the JGB market. However, bond strategists like Keisuke Tsuruta of Mitsubishi UFJ Morgan Stanley Securities note a disconnect between the government's perception and market concerns regarding fiscal expansion.
