Investing.com — A global bond sell-off that picked up steam in earnest two weeks ago eased up over the past few days, however traders largely remain averse to government debt amid rising expectations for interest rate hikes by central banks across the world to combat the emerging inflationary shock from surging oil prices. The rout in the Japanese bond market in particular grabbed some attention.
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Japan’s 10-year government bond yield recently hit levels not seen since September 1996, while the surged to its highest level on record. Fixed-income market participants have dumped government bonds amid rising inflationary pressures in a nation heavily reliant on the Strait of Hormuz for oil and expectations that the Bank of Japan (BoJ) will hike interest rates.
The Asian nation has unveiled measures such as capping gas prices through aggressive subsidies for oil wholesalers, helping core annual inflation in April decelerate to a four-year low. However, producer prices last month rose at their fastest annual pace since May 2023.
Meanwhile, the Japanese yen has also been under pressure. After what many traders believe was a round of currency intervention by Tokyo at the end of April, the yen has again weakened against the dollar and re-approached the key 160 level.
“While FX intervention dominated the headlines a couple of weeks ago, Japan’s bond markets have come under increasing pressure. This Update argues that most of the past rise in yields has been benign, but that the market is approaching a point – if it’s not already there – at which the ’reflation trade’ is fully priced in. Further rises in inflation and yields, therefore, might put greater pressure on the BoJ to act, either through rate hikes or its balance sheet,” Thomas Mathews, head of markets Asia Pacific at Capital Economics, said in a research note on Thursday.
“While (the increase in Japanese yields) over the war hasn’t been the largest among major economies (that of the UK haven risen by more, and those in the U.S. and France by similar amounts) the curve’s ’bear steepening’ does clearly stand out. Indeed, it’s attracted attention from policymakers including at the recent G7 meetings, for example, with BoJ Governor Ueda noting the Bank is watching the market closely,” Mathews added.
The analyst noted that one of the primary drivers of the bounce in yields, not just recently but over the past few years, has been concerns about Japan’s fiscal position.
“The war – and in particular the government’s decision to cap energy prices – has clearly exacerbated those. We estimate that an oil price of ~$130 (per barrel) over the rest of the year, for example, would cost the government about 2% of GDP. That probably means the risk of a lot more issuance, as hinted at by PM Takaichi’s recent talk of a supplementary budget. So, perhaps it’s not surprising that long-dated yields have risen and those at the ’superlong’ end have risen even more, partly undoing their relative fall since mid-2025,” Mathews noted.
Here are some exchange-traded funds of interest that track Japanese markets: , , and .