(Bloomberg) -- Japan’s 40-year government bond yield climbed to its highest in 16 years amid a surge in global yields as traders reassess the US Federal Reserve’s rate cut path.
The yield climbed 1.5 basis points to 2.535% in early trading in Tokyo on Wednesday. Bonds are slumping globally, with the 10-year Treasury yield topping 4.2% for the first time since July. The selloff has extended to German securities, as well as to other government bonds in Asia.
With global bond yields continuing to climb, “there is still a risk of yields rising in Japan,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management, noting that the depreciation of the yen is also adding to the pressure.
Comments from Fed officials suggesting that they may be more cautious about cutting interest rates is leading traders to reassess the Fed’s outlook. The rise in US yields is also triggering a yen slide, with the currency dropping as much as 0.5% against the dollar to 151.80 on Wednesday, its weakest level since July.
There is also growing speculation that Japan’s central bank will push ahead with rate hikes in the coming months, particularly as the yen continues to weaken. Although the BOJ is widely expected to keep its benchmark rate of 0.25% at its next policy meeting this month, the swaps market is signaling expectations that the central bank has about a 66% chance of a quarter-percentage-point rate hike by January.
Japanese Prime Minister Shigeru Ishiba said that he seeks to align with the BOJ, after his earlier remarks that the nation isn’t ready for more rate hikes. The International Monetary Fund is gaining confidence over the sustainability of Japan’s inflation, and expects the BOJ to proceed gradually with interest rate hikes, according to Nada Choueiri, the Japan mission chief, who spoke in an interview on Tuesday. The IMF expects a nominal neutral rate of about 1.5%, higher than private economists’ estimate of 1%.
Yields on 30- and 40-year sovereign bonds have also faced upward pressure due to decreased demand from life insurers, one of their main investors. The insurers had been increasing holdings of Japan’s longest bonds to comply with new regulations, but those deals appear to have run their course, market experts say.
The yield is also rising on the back of uncertainty surrounding the government’s finances, as well as Japan’s lower house election this weekend. The focus is on whether the ruling Liberal Democratic Party and its long-running coalition partner Komeito will be able to secure a majority of seats.
If the LDP and Komeito fail to secure a majority, it will lead to unstable politics, and “the pressure to expand the budget will increase,” said Yusuke Ikawa, market strategist at BNP Paribas Securities Japan.
(Updates with comment, additional details and latest prices)
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