Japan’s bonds, currency slide as fiscal concerns mount

TOKYO: Japanese government bonds (JGBs) slid sharply on Thursday, sending 30-year yields to an all-time high, as concerns mounted over the country’s fiscal health and the yen’s depreciation to a 10-month low.

The 30-year JGB yield rose 5 basis points (bps) to an unprecedented 3.39%, while the 20-year yield rose 3.5 bps to 2.85%, the highest since June 1999.

The benchmark 10-year yield rose as high as 1.835%, a level not seen since June 2008.

Japan’s government is in the final stages of assembling a spending package worth 21.3 trillion yen ($135.38 billion), a draft seen by Reuters showed.

That would far exceed the 13.9 trillion yen stimulus slate from the previous year, and also reflects Prime Minister Sanae Takaichi’s expansionary fiscal and monetary policies.

The yen depreciated to 157.48 per dollar, its weakest level since January 15, and hovered near a record low against the euro.

“Yields across the curve are under upward pressure, with super-long yields on track to increase further on concerns about the country’s worsening fiscal health,” said Katsutoshi Inadome, a senior strategist at Sumitomo Mitsui Trust Asset Management.

“A weak yen raised expectations for an earlier interest rate hike by the Bank of Japan.”

The Bank of Japan must continue to normalise monetary policy by raising real interest rates to avoid creating unintended distortions in the future, board member Junko Koeda said.

That followed a meeting on Wednesday between BOJ Kazuo Ueda and key economic ministers, with Finance Minister Satsuki Katayama saying afterwards that officials agreed to watch market developments with a “strong sense of urgency.”

Investors appeared to interpret the meeting as meaning “the Takaichi administration intends to stick with a reflationary policy stance even as the currency continues to weaken and longer-term interest rates keep rising,” Yusuke Matsuo, a senior market economist wrote in a note.

The two-year JGB yield rose 3.5 bps to 0.96%, while the five-year yield rose 4.5 bps to 1.305%, both at the highest levels since 2008.