Japan Two-Year Government Bond Yield Rises To Highest Since 2008

Japan’s two-year government bonds fell, pushing yields to the highest level since 2008 amid increased expectations that the central bank may raise interest rates this year.

The two-year yield, which is sensitive to monetary policy expectations, climbed 0.5 basis points to 0.885%. The move comes ahead of the BOJ’s policy decision on Friday where it’s widely expected to hold rates steady, with the market focused on any clues on the likelihood of a move next month or in December.

The increase in yields on shorter-maturity debt coincides with rising yields for longer-dated debt, which is being driven by concerns about future inflation as Japan’s government faces pressure to increase spending and reduce taxes. Yields also climbed in the US overnight after weekly employment data cast doubt on the outlook for further reductions this year.

The picture is complicated for the BOJ by uncertainty over tariffs as well as political risks after Prime Minister Shigeru Ishiba announced his plans to step down. Still, BOJ officials are of the view that it may be possible to raise the benchmark interest rate again this year regardless of political instability, as economic conditions have developed in line with expectations, according to people familiar with the matter.

Most BOJ watchers expect authorities to lift the benchmark interest rate by January, while the proportion picking next month as the likely timing edged down after Ishiba’s resignation, according to a Bloomberg survey. Overnight index swaps show about a 65% chance of a rate hike by the BOJ by the end of the year.

US Treasury Secretary Scott Bessent has said the BOJ is falling behind the curve in addressing inflation, in a rare admonishment of policy decisions by a foreign central bank. BOJ Governor Kazuo Ueda also said last month that he expects a tight labor market to keep upward pressure on wages in remarks at the Fed’s annual symposium in Jackson Hole, Wyoming.

Source: Bloomberg Europe