Japan’s 10-Year Bond Yield Hits 1% as Market Eyes Policy Shifts

Japan’s 10-year sovereign bond yield reached the significant 1% level for the first time since the Bank of Japan (BOJ) implemented unprecedented stimulus measures in 2013. This milestone shifts the focus to the potential pace of tightening the BOJ’s super-easy monetary policy and the future trajectory of yields.

Yields for 20- and 30-year bonds have recently hit decade highs, driven by persistent inflation above the central bank’s 2% target for the past two years. Analysts anticipate further increases in bond yields.

“If rate expectations increase, Japanese government bond yields across the curve, particularly for the 10-year, are likely to rise more,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. He predicts the 10-year yield may reach 1.2% in the coming weeks.

On Wednesday, the 10-year yield rose by two basis points, marking the highest level since May 2013. This rise is notable as the 10-year yield was once the benchmark for the BOJ’s yield-curve control policy, which was abolished in March along with the negative interest rate policy.

Swap markets are now pricing in a 60% chance of another rate hike by the BOJ’s late July meeting, a significant increase from the 14% probability at the time of the BOJ’s historic March policy shift. Goldman Sachs strategists project the 10-year yield could reach 2% by the end of 2026, anticipating a prolonged tightening cycle by the BOJ.

Despite rising bond yields, the yen has remained weak, partly due to the wide yield gap between the US and Japan, particularly for shorter notes. This gap fuels carry trades, where investors borrow cheaply in one country to invest in higher-yielding assets in another, according to Shusuke Yamada, head of Japan currency and rates strategy at BofA Securities Japan.

The BOJ’s view on inflation is under scrutiny, with Governor Kazuo Ueda suggesting that the bank might raise rates if the inflation trend continues as expected. Tom Kenny, senior international economist at Australia & New Zealand Banking Group Ltd., noted that quantitative tightening might also be considered to reduce the BOJ’s accumulated assets. Senior BOJ officials have indicated a low tolerance for inflation risks.

The next BOJ policy meeting is scheduled for June 13-14. Speculation about reduced bond purchases by the BOJ, following a cut on May 13, has added upward pressure on yields. However, the BOJ did not repeat the reduction at a subsequent operation, with the next operation set for Thursday.

“There’s concern that yields will continue to rise above the 1% mark,” said Keiko Onogi, senior JGB strategist at Daiwa Securities Co., following the BOJ’s recent reduction in bond buying.