JGB yields rise sharply as weak yen fuels bets for BOJ rate hike

TOKYO: Japanese government bond yields rose sharply on Friday as the weak yen and rising oil prices fuelled bets that the Bank of Japan would raise its interest rates earlier.

The two-year yield, most sensitive to BOJ’s policy rates, rose 2 basis points to 1.51%, its highest level since May 1995.

The 30-year yield, which reflects inflation worries, rose to as high as 4%, its highest since July 9, and was last up 6.5 bps at 3.980%.

Prospects for a rate hike at the BOJ’s policy meeting in October have increased after a Bloomberg News report that said BOJ officials were open to raising interest rates at a faster pace than the consensus among economists.

The two-year bond yield has risen 8 bps this week, its sharpest weekly jump since mid May.

“The market expectations for the October rate hike might be too high,” said Rinto Maruyama, senior strategist for FX and Rates at SMBC Nikko Securities.

“The central bank needs more time to review the effects of its June rate hike on the economy, such as on higher rates on corporate lending,” said Maruyama.

The Bloomberg report, which did not cite anyone, came after the yen fell to an almost four-decade low against the US dollar, raising concerns on import costs and accelerating inflation.

The BOJ is concerned about the weak yen and its impact on prices, and it would turn hawkish to reverse the trend when necessary, said Maruyama. But such messages would come from public speeches by BOJ top officials or board members, he said.

On Friday, super-long ends sold off more heavily on growing inflation worries after oil prices settled above $100 overnight, steepening the yield curve.

Market players might have sold super-long bonds after the yield curve flattened in the previous session, said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management.

The rise in yields on two- and five-year bonds was capped until recently as their yields had priced in the BOJ’s future rate hike path.