The Zhitong Finance App learned that Japan's 10-year government bond yield rose to 3% on Tuesday for the first time since entering the 21st century, marking that the country's bond market is returning to an important milestone in the normalization process after the benchmark borrowing costs hovered near zero for many years. The yield rose 6 basis points on the same day, hitting the 3% mark, the highest level since 1996. However, in the same period last year, the yield was only half of the current level, highlighting the rapid changes, which are affecting the Japanese economy and global financial markets.
Since the Bank of Japan ended the world's last negative interest rate policy in 2024, the operating logic of the country's bond market has fundamentally changed. Treasury bonds, which were previously subject to price control by the Bank of Japan for a long time, are now driven to a greater extent by the independent decisions of domestic and foreign investors — their trading basis shifts to inflation and growth prospects, and risk-return ratios of Japanese bonds compared to other assets, rather than the central bank's policy orientation.
“Higher yields will put pressure on stock portfolios through market capitalization losses, but at the same time create a more attractive entry point for fixed income investors,” said Wee Khoon Chong, Asia Pacific senior market strategist at Bank of New York Mellon. “Japanese treasury bonds are once again becoming a credible allocation option.”
Although the Bank of Japan still holds a huge amount of domestic treasury bonds, rising yields are encouraging local Japanese institutions to increase their holdings, while global funds are increasingly active in trading in this market. Currently, international investors account for about two-thirds of the monthly spot daily bond trading volume, which is far higher than 12% in 2009.
These changes coincide with an overall rise in global bond yields — rising crude oil prices have heightened concerns about inflation, and market expectations of the Fed's interest rate hike continue to heat up, thereby boosting the volatility of the Japanese market. The Bloomberg Global Sovereign Bond Yield Index rose for the fourth consecutive trading day on Monday to 3.72%, the highest since mid-2008.
The rise in yield on Japanese treasury bonds also reflects that the country's once stagnant economy is fully re-inflated, corporate profits are rising sharply, and wage levels are rising at the same time. For the Japanese government, the challenge is to ensure that economic growth actually translates into sufficient tax revenue to cover financing costs that increase as yields rise. In this context, Japan's Ministry of Finance has allocated a record amount of 36.6 trillion yen (about 230 billion US dollars) in the initial budget application for the next fiscal year.
The yield on 10-year Japanese bonds declined slightly after the same-day treasury bond auction, and demand for auctions was basically in line with the 12-month average.
As investors increase their bets that the Bank of Japan will raise interest rates again soon, it is likely that this month or next month, the yield on various Japanese treasury bonds will rise across the board. According to reports, Prime Minister Takaichi Sanae's government supports recent interest rate hikes to cope with the continued weakness of the Japanese yen. US Treasury Secretary Scott Bessent also pressured the Bank of Japan to take the next step in monetary policy.
Overnight index swap data shows that the probability that the Bank of Japan will raise interest rates before September is about 92%, while the October rate hike has already been fully priced.
Fiscal sustainability concerns are also reflected in rising yields. Takaichi Sanae has announced an unprecedented spending plan aimed at reshaping the Japanese economy, but the government has yet to determine how to finance food consumption tax cuts. As yields rise, investors are increasingly sensitive to the prospect of the government increasing borrowing.
“Although some bond investors may have found the current level attractive and begun to buy, more participants are still betting that yields will rise further,” said Hiroshi Namioka, chief strategist at T&D Asset Management. “Furthermore, financial concerns may raise the risk of a further weakening of the yen, so I think it will take time for meaningful funds to flow back.”