(March 26): Japan’s two-year government bond yield climbed to its highest level since 1996, while five-year yields hit a record, as expectations build for a near-term Bank of Japan rate hike.
The two-year rate, which is sensitive to monetary policy expectations, rose 1.5 basis points to 1.32% on Thursday, surpassing a previous high of 1.31% reached last month. The five-year yield rose as much as 2.5 basis points to 1.74%, the highest since its 2000 debut.
The moves come amid a broader global selloff in bonds, as markets price in an oil-driven inflation shock following the start of the Iran conflict. Central bank warnings on persistent price pressures have pushed short-dated yields higher, while traders have largely unwound expectations for Federal Reserve easing this year.
“This is a result of the market pricing in a BOJ rate hike in response to rising inflation in Japan,” said Rinto Maruyama, FX and rates strategist at SMBC Nikko Securities Inc. “I believe higher oil prices have raised the expected terminal rate.”
Overnight index swaps suggest traders are pricing in a 64% chance of a move by April, and 89% for June. Rising oil prices are also weighing on the yen, which is approaching the key 160-per-dollar level.
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Governor Kazuo Ueda kept the possibility of an April hike on the table after the central bank’s policy meeting last week. Meanwhile, Japan’s largest labour union group reported an average pay increase of above 5% for a third straight year, adding to evidence of sustained inflation pressures under Sanae Takaichi’s government.
“There is a growing recognition that the Takaichi administration’s approach of using subsidies to curb energy prices was a mistake, and expectations of an early interest rate hike by the Bank of Japan are increasing,” said Ryutaro Kimura, a senior fixed-income strategist at AXA Investment Managers.
The government has pledged subsidies to keep gasoline prices around ¥170 ($1.37) per litre, allocating ¥800 billion from fiscal 2025 budget reserves. While the measures may cushion households, they also highlight a policy trade-off, as fiscal support risks complicating the BOJ’s path toward tightening.
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