The yield on the benchmark 10-year Japanese government bond rose to the highest since May 2006 after the central bank lifted its key policy rate on Friday and signalled further tightening.
The yield climbed 4 basis points to touch 2.005%, topping the 2% level that had acted as a symbolic ceiling during Japan’s decades-long struggle with deflation.
JGB yields jumped on Friday after the central bank hiked the key 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 normalizing policy.
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.
The rise in JGB yields has built momentum since early November as market speculation intensified over the potential size and shape of a stimulus package under the new government of Prime Minister Sanae Takaichi.
JGB yields took another leg higher at the start of December when Bank of Japan Governor Kazuo Ueda sent a strong signal that policymakers would imminently consider resuming interest-rate hikes.
The 10-year yield sat around 1.65% at the end of October.
The simultaneous loosening of fiscal restraint and tightening of monetary conditions is something of a policy paradox, but it underscores Japan’s current struggle with rising living costs, particularly for food and energy, which has been exacerbated by a weak yen.
Sharply rising consumer prices are a predicament unfamiliar to a generation that experienced seven consecutive years of deflation from 1999 and decades of economic stagnation.
It was not until the global inflation shock triggered by the COVID pandemic that Japan began to shake off its deep-rooted deflationary mindset. Now, gains in consumer prices are running around 3% and have exceeded the BOJ’s 2% target for well over three years.
The rise in JGB yields is more reflective of overspending by Takaichi’s new administration than optimism about a reflating economy, said Kei Fujimoto, senior economist at SuMi Trust.
“Concern about the fiscal stance could accentuate and lead to a weaker yen, in turn leading to higher import and domestic prices. So, this is not something that’s a good sign of economic recovery,” he said.
AloJapan.com