10-Year Japanese Government Bond Yield Hits 15-Year High... Bank of Japan Likely to Accelerate Rate Hikes

As Q4 Growth Exceeds Expectations

5-Year and Other Government Bond Yields Also Show Strength

Outlook for Additional Rate Hikes Gains Momentum

Japan's 10-year government bond yield has jumped to its highest level in 15 years. This follows better-than-expected economic indicators, leading to speculation that the Bank of Japan is likely to accelerate its interest rate hikes.

The 10-year Japanese government bond yield, which serves as a benchmark in Japan's bond market, rose 0.005 percentage points to 1.43% annually on the 18th, marking its highest level since April 2010. While the 10-year yield fell to 1.415% on the 19th, it remains at elevated levels. The 5-year government bond yield also closed at 1.05% annually, up 0.045 percentage points at one point, reaching its highest level since October 2008.

The rise in Japanese long-term yields was primarily influenced by Japan's GDP growth figures released on the 17th. Analysis suggests that bond yields strengthened as expectations for additional BOJ rate hikes gained momentum after fourth-quarter growth exceeded market expectations. Japan's economy grew 2.8% quarter-on-quarter on an annualized basis in Q4 last year, significantly surpassing market expectations of 1.0%.

The Nihon Keizai Shimbun reported that "This sends a message that the BOJ's rate hike has not negatively impacted the economy" and that "expectations have strengthened for additional rate hikes by the BOJ." The Bank of Japan raised its policy rate from 0.25% to 0.50% annually at last month's monetary policy meeting.

While the current policy rate is at its highest level since 2017, the BOJ could accelerate rate hikes to address inflation given the favorable economic conditions. Hiroshi Watanabe, Chairman of the Institute for International Monetary Affairs, stated, "If current high inflation persists, the BOJ could implement two more rate hikes this year," adding that "this would help prevent further yen weakness."

A senior BOJ official also indicated that additional rate hikes would be necessary if Japan's economy aligns with the central bank's outlook. Hajime Takata, a Board Member considered a 'hawk' within the BOJ, stated at a financial and economic meeting in Miyagi Prefecture on the 19th that "Japanese consumption and wages are rising, fueling inflation" and that "monetary tightening should be increased if the economy moves in line with BOJ projections." U.S. economic outlook uncertainty remains a variable. Takata noted that "U.S. rates could rise and the yen could depreciate further if the U.S. economy performs better than expected," adding that "we must also consider the possibility of market volatility arising from this."

Reporter Lee So-hyun y2eonlee@hankyung.com