Japan's 30-year government bond yield hits 3% for the first time in 30 years; "It could rise to 4% next year"

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TOKYO = Financial News, Seo Hye-jin correspondent] Japan's benchmark 10-year government bond yield reached 3% for the first time in 30 years. The move came as expectations grew that the BOJ would accelerate rate hikes, while worries over rising U.S. rates and the Takaichi Cabinet's expansionary fiscal policy also weighed on the market. Some analysts say the yield could rise to as high as 4% next year, and 3.15% by year-end.
On the Japanese bond market on the 1st, the newly issued 10-year government bond yield, the key gauge of long-term rates, rose as much as 0.060 percentage point from the previous session to 3.000% intraday. It was the first time the 10-year yield had reached 3% since September 1996, about 30 years ago. It later trimmed gains and closed at 2.990%, up 0.050 percentage point.
Yields rose across all maturities. The 2-year yield climbed to 1.795%, the highest since April 1995, while the 5-year yield hit an all-time intraday high of 2.265%. The 30-year yield also rose to 4.185% at one point, and the 40-year yield reached 4.270%. Analysts say the market is pricing in both further BOJ tightening and long-term fiscal risks.
At the day's auction for 10-year government bonds, the bid-to-cover ratio rose to 3.29 times, higher than the previous auction. As yields approached 3%, buying interest emerged from investors seeking returns, and the market described the result as "a solid outcome that was not as weak as feared."■ U.S. also pushes for rate hikes, adding fiscal concernsThe direct driver of the yield rise is the growing view that the BOJ will raise rates again soon. In the overnight index swap (OIS) market, the probability of a 0.25 percentage point rate hike at the BOJ's Monetary Policy Meeting on Sept. 17-18 has climbed above 90%. The chance of a total 0.5 percentage point increase by December has also risen to around 70%.
The United States has also urged Japan to raise rates. U.S. Secretary of the Treasury Scott Bessent met separately with BOJ Governor Kazuo Ueda and Minister of Finance Satsuki Katayama on Oct. 31 local time, conveying the need to clearly signal fiscal sustainability and the path of rate hikes to the market. He also told CNBC, "I believe the Japanese government and the BOJ will take steps that lead to a stronger yen."
The message came after the yen weakened again to around 160 per USD despite a joint yen-buying intervention by the United States and Japan at the end of July. Concerns that the BOJ is falling behind the curve in responding to inflation and the weak yen have also fueled government bond selling, with some warning that rates may need to rise more quickly going forward.
Tensions in the Middle East have added to the pressure. As the United States and Iran exchanged attacks for the first time in about a month, West Texas Intermediate crude oil rose to the mid-$80s per barrel. Renewed inflation worries in the United States pushed the 10-year U.S. Treasury yield into the upper 4.7% range, and that trend spilled over into the Japanese market.
The Takaichi Cabinet's expansionary fiscal policy is another source of concern. Japan's budget requests for fiscal 2027 have swelled to around 143 trillion yen, a record high. The government plans to invest more than 370 trillion yen in total, from both the public and private sectors, in key industries by 2040 and to cut the food consumption tax rate to 1% for two years, but it has not presented specific funding sources.
Long-term rates, which stood in the 1.6% range when Prime Minister Sanae Takaichi took office in October last year, have nearly doubled in less than a year. Analysts say the market is reflecting not only the BOJ's policy normalization but also growing doubts about fiscal soundness.■ Experts see a range of 1.5% to 4%; "3% is just a passing point"Market watchers are warning that yields could climb further if inflation and fiscal concerns persist. Masayuki Oguchi, chief fund manager at Mitsubishi UFJ Asset Management, told The Nikkei, "If Japan's inflation risks are fully priced in, 3% will be nothing more than a passing point."
In an emergency survey of six market experts conducted by QUICK on the day, most forecasts for the upper end of long-term yields by year-end clustered around 3.0% to 3.15%. But the outlook for 2027 varied widely, ranging from a low of 1.5% to a high of 4%. The pace of BOJ rate hikes and the Takaichi Cabinet's fiscal management were cited as the key variables.
Nomura Securities expects the BOJ to raise rates this month and again in January and April next year, but says long-term yields should stabilize at 2.6% to 2.85% next year once the end point of the tightening cycle becomes clear. By contrast, Resona Asset Management and others see yields rising to as high as 3.5% on fiscal concerns and further rate hikes.
PineBridge Investments set its forecast range for next year at 2% to 4%. It said yields could fall back into the 2% range if tensions in the Middle East ease, but warned that continued expansionary fiscal policy amid high inflation could push them toward 4% as the BOJ tightens further.
[email protected] Seo Hye-jin Reporter