Yields on Japanese sovereign bonds rose across the board on Thursday, with the two-year bond yield reaching its highest point since May 1996, marking the definitive end of Japan's era of low interest rates. Against the backdrop of the threat of a second global energy crisis triggered by war in Iran, Japan's vulnerability as a net importer of energy has been fully exposed. As oil prices exceed the $100 mark, domestic inflationary pressures in Japan have spread from the energy sector to services, forcing the market to adjust upwards the expectations of the Bank of Japan's policy shift speed.
Market Reaction
According to records from the Japan Bond Trading Company, the latest trade on the two-year government bond was at 1.32%, driven primarily by the market's strong hedging for a rate hike by the Bank of Japan to 1.00% in April. Although yields on long-term instruments like the 30-year bond remain stable at around 3.505%, the sharp fluctuations in short-term and mid-term yields reflect that policy-sensitive assets are at the core of a revaluation. Safe-haven funds are continuously retreating from the Japanese bond market due to concerns over narrowing interest rate differentials and inflation erosion.
Policy Background
Hawkish voices within the Bank of Japan are gradually taking the lead. The minutes from the meeting show that most members believe that the cost-passing effects brought by the tightening labor market can no longer be ignored. In the current extreme environment with the spread of conflict in the Middle East and supply chain disruptions, the traditional macroeconomic management of the Bank of Japan faces severe challenges. LSEG's interest rate swap data predicts the approach of a historic moment—Japanese benchmark interest rates may shortly return to positive territory, which will not only change Japan's credit environment but also have profound ripple effects on global arbitrage trading.
