Inflation concerns push Japanese government bond yields to 28-year high

Japan’s heavy reliance on imported energy is intensifying inflation concerns as oil prices rise. The move has also fed into a sharp repricing in Japanese government bond (JGB) yields, with the 10-year benchmark climbing to levels not seen in decades.

Bond yields jump, then ease

On April 13, Japan’s 10-year government bond yield rose by 5.5 basis points to 2.49%, the highest in 28 years. By the morning of April 14, the yield eased back to below 2.43%. Prior to the spike, 2.44% had been viewed as an important ceiling for JGB yields. The last time the 10-year JGB yield exceeded this level was in 1998, when the Japanese Finance Ministry stopped buying government bonds.

“The yield range has moved to a new level,” said Noriatsu Tanji, Chief Bond Strategist at Mizuho Securities, in an interview with Nikkei Asia. He linked the shift to the fact that inflation in Japan today is higher than in the 1990s, when Japan was moving toward a deflationary period lasting more than two decades.

Inflation backdrop raises expectations for higher policy rates

Tanji said Japan’s inflation environment has changed materially. With headline CPI surpassing the BOJ’s 2% target for four consecutive years from 2022 to 2025, he argued that “the appropriate policy rate in the current context must also be higher than the average before.”

Moody’s Analytics’ Stefan Angrick added that foreign investors may be a key driver of the market move. “There’s broad acceptance that foreign investors are more active on the Japanese government bond market now... Thus, they may be a key driver of the market’s moves,” Angrick said.

Oil prices and currency pressures feed the inflation narrative

Oil developments have also been a catalyst. On April 13, after U.S.-Iran peace talks concluded the previous day without an agreement, WTI crude briefly traded above $105 a barrel. By the morning of April 14, oil prices had fallen back to around $97–98 per barrel after the United States left open the possibility of continued talks with Iran.

Given Japan’s reliance on energy imports, higher oil prices are stoking inflation fears. In this context, investors have sold Japanese government bonds heavily, anticipating that the BOJ will be forced to raise rates.

The BOJ policy meeting is scheduled for April 27–28.

Yen depreciation and trade deficit concerns

Another factor that could push the BOJ toward higher rates is the yen’s depreciation. Tsuyoshi Ueno, Research Director at the National Laboratory of ... , cited concerns about Japan’s widening trade deficit driven by high oil prices and a strong dollar.

Long-dated yields rise since the 2022 rate shift

Long-dated JGB yields have been trending higher since the BOJ began raising rates in 2022, after keeping rates near 0% since 1999. Ueno noted that Japan’s core CPI inflation has remained above the BOJ’s 2% target since April 2022, except in February this year when inflation was tempered by government energy subsidies.

Potential impact on growth, financial institutions, and households

Ueno warned that rate increases could slow Japan’s growth by dampening capex and real estate investment. He also said higher rates could lead to paper losses for financial institutions.

While households may benefit from higher yields on investments and savings, Ueno cautioned that wealth inequality could widen. He pointed to differences between asset-rich and asset-poor households, as well as across generations, with younger people potentially facing higher mortgage costs.