The yield on the benchmark 10-year Japanese government bond (JGB) rose 5 basis points to hit its highest level since August 1999 after the country’s central bank lifted its key policy rate on Friday, December 19, and signalled further tightening.
The 10-year JGB bond yield rose to 2.015%, breaking above the 2% level that had served as a symbolic ceiling during Japan’s decades-long struggle with deflation.
The rise in yields followed the Bank of Japan’s (BOJ) decision to hike the key interest rate by a quarter point to a three-decade high of 0.75%. While the move was telegraphed in advance by BOJ Governor Kazuo Ueda, the central bank also said it was ready to continue normalising policy.
The JGB yields have been in an uptrend since early November as market speculation intensified over the potential size and structure of a stimulus package under the new government of Prime Minister Sanae Takaichi.
Meanwhile, they rose further earlier in December when BOJ’s Governor sent a strong signal that policymakers would imminently consider resuming interest-rate hikes.
In the years after Japan’s “bubble” economy burst in the 1990s, the 10-year JGB yield fell below 2% in 1999 and never returned above that level, aside from a brief spike to 2.005% on May 10, 2006, as per a Reuters report.
The BOJ’s decision to raise short-term rates to 0.75% marks another step in ending decades of huge monetary support in the country. Analysts said it would need to plot a careful path to manage inflation as Japan’s new government prepares major fiscal stimulus.
Yen falls sharply
Ankita Pathak, Chief Macro and Global Strategist at Ionic Wealth, said even after hiking rates by 50 bps in this calendar year, the real interest rate in Japan remains extremely negative ~ at 2.2%, thereby underscoring BoJ’s intent to also support growth while attempting to curb inflation.
She added that the pace of rate hikes to remain well calibrated, as growth concerns linger, but dismissed fears of a yen carry trade.
“Yen is now more subject to policy movements vs the last decade. While some effects are rather possible, the quantum of yen carry trade is already lower than the past decades.”
By late morning in Europe, the dollar was up nearly 1.2% on the day at 157.365 yen, set for its largest one-day rise since early October and its strongest in a month.