Japanese Government Bond Yields Surge After BOJ Raises Rates for First Time in Years

The Bank of Japan (BOJ) lifted its key interest rate to 0.5% from 0.25%, ending years of near-zero policy and signaling a decisive pivot toward tightening. This decision sent shockwaves through Japan's fixed income markets, pushing the 10-year government bond (JGB10Y) yield up by 24 basis points to 1.28%—its highest level since early 2023. The rally in yields reflects investor concerns over sustained inflation and expectations of further rate hikes ahead. The immediate market reaction extended beyond bonds. The Japanese yen weakened sharply, trading at 148.60 per US dollar, down nearly 1.7% from pre-hike levels. This depreciation underscores the risk that tighter monetary policy could exacerbate currency volatility, particularly given Japan’s large trade deficit and reliance on imported energy. Equity markets also felt pressure. The Nikkei 225 dropped 1.3% in early trading, pressured by higher discount rates and reduced appetite for risk assets. Financial sector stocks were especially affected, with major banks seeing declines in their equity values as net interest margins face uncertainty under new policy conditions. The shift in monetary stance has significant implications for global investors holding JGBs, which are central to many international portfolios. With yields now above 1.2%, Japanese debt is becoming more competitive relative to other developed-market sovereign bonds, though structural risks remain related to fiscal sustainability and demographic headwinds.