Japan short-term yields hit 17-year high on BOJ rate-hike bets

TOKYO: Short-term Japanese government bond (JGB) yields hit a 17-year high on Wednesday on increasing certainty that the central bank would resume interest rate hikes at its meeting next week.

The two-year JGB yield rose 1 basis point (bp) to 1.075%, the highest since July 2007.

The five-year yield rose 0.5 bp to 1.445%.

Yields move inversely to bond prices.

“The move in the past couple of weeks has been pretty rapid - faster than we expected - and we don’t think the pace is sustainable,” said Shusuke Yamada, chief Japan foreign exchange and rates strategist at Bank of America.

“But in terms of the level, we’re not surprised.” Shorter-term securities, those especially sensitive to central bank policy, have been on a downward trajectory on recent hints by the Bank of Japan that it was preparing to raise its key policy rate by a quarter percentage point to 0.75% to tame inflation and declines in the yen.

Markets are now focused on the timing and extent of future hikes as the central bank targets its so-called terminal rate.

The 30-year JGB yield rose 1 bp to 3.39%, edging closer to the record high of 3.445% reached last week.

The benchmark 10-year yield edged 0.5 bp lower to 1.955%. Long-dated JGBs have been under pressure following Prime Minister Sanae Takaichi’s announcement of massive stimulus, which would be funded largely by new debt.

BOJ Governor Kazuo Ueda on Tuesday noted the “rapid” rise in JGB yields and said the bank remained able to ramp up bond buying in exceptional circumstances.

BofA’s Yamada believes the BOJ will raise rates next week, but says due to recent weak economic data, “there’s a limit to how credibly hawkish Ueda can be.”

Japanese megabank Mitsubishi UFJ Financial Group has been cautiously rebuilding its JGB positions since the benchmark 10-year yield rose above 1.65%, MUFG executive Hiroyuki Seki told Reuters.

If the yield exceeds 2%, the bank plans to accelerate purchases, Seki said.