How High Could Japanese Government Bond Yields Go?

Longest Inflation Streak Since 1992
Takaichi Administration's Fiscal Expansion Drives Surge in Bond Issuance
Falling Demand for Government Bonds Likely to Keep Yields Elevated

Japanese government bond yields have surged to their highest levels since 2008. As of December 1, the two-year yield exceeded 1.02%, while the ten-year yield soared to 1.87%, marking a 17-year high. This is due to investors purchasing fewer government bonds amid expectations that interest rates will rise further.

On December 3, Hana Securities released a report titled "Japanese Government Bond Yields Soaring Rapidly," stating, "In addition to Japan's ongoing inflation and wage growth, the recent fiscal expansion by the Takaichi administration has increased the likelihood that the Bank of Japan (BOJ) will raise rates again in December." The report forecasted that Japanese government bond yields are likely to remain elevated for the time being.

Rate Hikes Fueled by Inflation and Wage Growth

One reason for the rise in Japanese government bond yields is concern about a rate hike in December, driven by inflation and wage increases. In October, the Consumer Price Index (CPI) rose to 3.0%, exceeding the BOJ's 2% target for the 43rd consecutive month. This is the longest streak since 1992.

The core CPI, excluding fresh food, also stood at 3.0%, while the so-called "super-core" CPI, which excludes both fresh food and energy, reached 3.1%. All measures of inflation rose simultaneously. The weakening yen and corporate wage hikes further pushed up prices, raising the probability of a BOJ rate hike in December (from the current 0.50% to 0.75%) to as high as 80%.

Yonhap News Agency

Government Fiscal Expansion Heightens Market Anxiety

The Sanae Takaichi administration announced an additional budget of 18.3 trillion yen (approximately 172 trillion won) at the end of November. The funds will be used for living stability and inflation response (8.9 trillion yen), growth investment (6.4 trillion yen), and defense enhancement (1.6 trillion yen). Sixty-four percent of the funding, or 11.7 trillion yen, will be raised through government bonds (8.2 trillion yen in deficit-financing bonds and 3.5 trillion yen in construction bonds), increasing this year's total government bond issuance to 40.3 trillion yen.

Sanae Takaichi Japanese Prime Minister

Concerns over a BOJ rate hike in December, combined with the Takaichi administration's expansionary fiscal policy, have unsettled the market, leading to weaker demand for government bonds in recent auctions. At the end of November, the bid-to-cover ratio for two-year bonds was 3.53%, lower than the 12-month average of 3.66%. Demand for ten- and twenty-year bonds was also weak.

BOJ Governor's Comments Interpreted as Rate Hike Signal

On December 1, BOJ Governor Kazuo Ueda stated, "We will assess and discuss domestic and international economic and price conditions, as well as financial market trends, based on a variety of data and information, and will make an appropriate decision on whether to raise rates." This was interpreted as a signal that the BOJ is prepared to raise rates, pushing yields even higher.

Bank of Japan (BOJ) building. Photo by AFP

Heo Seongwoo, an analyst at Hana Securities, predicted, "Given the increased likelihood of a BOJ rate hike in December, the rise in mid- to short-term government bond issuance due to the additional budget, and structural inflation and wage pressures, Japanese government bond yields are likely to remain elevated for some time, even if there are temporary adjustments."

This content was produced with the assistance of AI translation services.