The yield on Japan's two-year government bond has surged to 1%, marking its highest level since 2008, according to reports from Wu Blockchain and The Japan Times. This critical threshold breakthrough signals growing market conviction that the Bank of Japan (BOJ) will raise its benchmark interest rate in the coming months.
Further bond yields have also climbed, with the five-year bond yield jumping to 1.35% and the 10-year bond yield reaching 1.845%. Concurrently, the yen strengthened by 0.4% against the U.S. dollar, highlighting the interconnectedness of these financial movements.
Market participants are pricing in a high probability of rate hikes, with a 76% chance at the BOJ's December 19 meeting and over 90% for January. Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corp., noted, "Growing expectations of a BOJ rate hike are helping the yen appreciate and putting upward pressure on the two-year JGB yield."
The rise in yields reflects concerns over inflation, which has been running above the BOJ's 2% target, and comes amid cooling corporate activity. Capital expenditure declined by 0.3% in the third quarter, though preliminary GDP data showed overall corporate investment grew by 1%.
This monetary shift could unwind the yen carry trade, a strategy where investors borrow low-interest yen to invest in higher-yielding assets. The previous BOJ rate hike in August 2024 triggered significant market turbulence, and a repeat could lead to sharp downturns, increased liquidations, and global volatility.
For cryptocurrency markets, higher Japanese interest rates may strengthen the yen, affecting global liquidity conditions and risk appetite. The unwinding of carry trades could reduce leverage in global markets, potentially increasing volatility for cryptocurrencies as traders adjust positions.
Additionally, the Ministry of Finance plans to increase issuance of short-term debt to fund economic packages, which may further pressure bond yields. Ryutaro Kimura of AXA Investment Managers advised caution, citing anticipated inflation re-acceleration and supply-demand imbalances.
Investors are closely watching BOJ Governor Kazuo Ueda's upcoming speech and policy decisions for further clues on the trajectory of Japan's monetary policy.
