Japan 10-Year Bond Yield Hits 3%, Highest Since October 1996

Japanese government bonds were sold across the board on Tuesday, with the yield on the benchmark 10-year bond jumping to 3.000 percent for the first time since October 1996.

Growing expectations of another interest rate hike by the Bank of Japan to curb inflationary risks and persistent concern about the country’s worsening fiscal health drove the bond selling, analysts said.

The barometer of long-term interest rates crossed the key threshold shortly after afternoon trading began, a day after government ministries and agencies submitted their budget requests for the next fiscal year.The requests totaled a record 143 trillion yen ($890 billion), heightening wariness over Japan’s fiscal health under Prime Minister Sanae Takaichi’s expansionary fiscal policy.

Bond yields also rose as inflationary concerns reemerged after benchmark West Texas Intermediate crude oil futures topped $85 per barrel amid renewed fighting between the United States and Iran.

The focus is now on “how the budget size will be determined, what specific revenue source will be used and how spending will be controlled to maintain fiscal discipline,” said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management Co.

“(What matters is) How the government responds to the message from markets and how it manages the situation,” he added.

The yield on the benchmark 10-year Japanese government bond ended up 0.050 percentage point from Monday’s close at 2.990 percent.

The U.S. dollar briefly rose above the 160 yen line but stayed mostly in the upper 159 yen range during Tokyo trading. Yen-selling on higher crude oil prices was offset by yen-buying as remarks by U.S. Treasury Secretary Scott Bessent and his meeting with Bank of Japan Governor Kazuo Ueda and Finance Minister Satsuki Katayama fueled speculation that the central bank could raise interest rates again this month.

At 5 p.m., the dollar fetched 159.98-160.00 yen compared with 159.68-78 yen in New York and 159.56-58 yen in Tokyo at 5 p.m. Monday.

The euro was quoted at $1.1595-1596 and 185.50-54 yen against $1.1612-1622 and 185.52-62 yen in New York and $1.1601-1603 and 185.11-15 yen in Tokyo late Monday afternoon.

Tokyo stocks ended mixed, with investor sentiment dampened by Middle East tensions, while a year-on-year increase in Japanese companies’ capital spending in the April-June quarter supported the broader market.

The 225-issue Nikkei Stock Average ended down 96.59 points, or 0.15 percent, from Monday at 66,215.34. The broader Topix index finished 25.57 points, or 0.62 percent, higher at 4,181.86.

On the top-tier Prime Market, the main gainers were electric power and gas and mining issues, while service and nonferrous metal shares were notable decliners.

While stocks in most sectors rose, artificial intelligence- and semiconductor-related shares largely fell amid growing concern that they had become overvalued, dealers said.

As recent gainers led the declines, Wataru Akiyama, strategist in the Investment Content Department of Nomura Securities Co., said, “We believe sector rotation is currently taking place in the market, although we expect it to be short-lived.”