preferred on
Points of Focus
- Japan’s 10-year government bond yield hit 3%, highest since 1996.
- Scott Bessent is pushing Tokyo toward faster monetary policy tightening.
- Rising yields reflect inflation, weak yen and growing fiscal concerns.
Japan’s benchmark 10-year government bond yield reached 3% on Sept. 1 for the first time since 1996, marking another break from the ultra-low-rate regime that defined the country’s bond market for decades.
The yield climbed as much as six basis points to 3%, roughly double its level a year earlier. Japan’s two-year yield also rose to 1.81%, its highest in 31 years, as investors increased bets that the Bank of Japan will raise interest rates again this month.
The move came amid a wider global bond selloff, but Japan faces additional domestic pressure from persistent inflation, a weak yen and concerns over Prime Minister Sanae Takaichi’s expansionary fiscal agenda.
Bessent increases pressure on Bank of Japan
US Treasury Secretary Scott Bessent has added an unusual external voice to the debate over Japanese monetary policy.
Speaking around the G20 finance meetings, Bessent said he expected BOJ Governor Kazuo Ueda to “do the right thing” and suggested Japanese authorities would take measures that lead to a stronger yen.
“I have information that the market doesn’t have,” Bessent told CNBC, adding that he believed Japan’s government and central bank would act in ways that strengthen the currency.
Bessent also met Ueda and called for monetary policy capable of anchoring inflation expectations and reducing excessive currency volatility. His remarks were widely interpreted as support for another BOJ rate increase.
A Reuters poll published last week found economists expect the BOJ to lift its policy rate to 1.25% in September, after raising it to 1% in June. Nearly two-thirds expected the rate to reach at least 1.5% by the end of March 2027.
Weak yen and inflation change Japan’s bond market
The pressure for higher rates is partly coming from the currency.
A weaker yen raises the cost of imported energy and other goods, feeding domestic inflation. Japan and the US intervened jointly in currency markets earlier this summer, but intervention alone has struggled to reverse the underlying pressure.
Higher BOJ rates would narrow the gap with US interest rates and could support the yen, although they would also increase financing costs inside an economy carrying government debt above 200% of GDP.
That tension is now showing directly in government bonds.
Japan’s 10-year yield was below 1% as recently as 2024. The BOJ’s exit from negative interest rates and gradual reduction of its grip over the bond market have allowed investors to price inflation and fiscal risk more freely.
The last comparable period was three decades ago. Bank of Japan records show long-term rates around 3.1% in early 1996, while historical 10-year data put yields above 3% for much of that year.
Fiscal policy is becoming part of the rate-hike debate
The bond selloff is not solely a monetary-policy story.
Investors are increasingly questioning how Takaichi’s government will finance spending on areas including AI and semiconductors while maintaining fiscal discipline. Rising borrowing costs make that calculation harder just as Japan’s effective interest burden begins increasing after years of near-zero rates.
Longer-dated Japanese bonds are reflecting the same pressure, with 20- and 30-year yields also reaching multi-decade highs.
The 3% threshold therefore marks more than a technical milestone. Japan is moving into a world where government borrowing again carries a meaningful cost, the BOJ faces pressure to tighten faster, and even Washington is openly arguing that higher Japanese rates may be necessary to stabilize the yen.
Share
Most read articles
