Japanese Government Bond Yields Rise as Yen Weakness Fuels BOJ Rate Hike Expectations

Japanese government bond (JGB) yields extended their upward trajectory on Monday, with the 10-year benchmark reaching 1.18%, marking its highest level since mid-2023. This move followed a sharp depreciation of the yen, which traded above 158.70 per U.S. dollar, fueling speculation that the Bank of Japan (BOJ) may shift toward tighter monetary policy sooner than expected. The weakening JPY has heightened concerns over inflationary pressures and capital outflows, reinforcing investor expectations for a policy pivot. The recent surge in the USD/JPY exchange rate reflects heightened demand for dollar-denominated assets amid divergent global interest rate paths. As U.S. yields remain elevated, the carry trade—where investors borrow in low-yielding yen to invest in higher-yielding currencies—has intensified. This dynamic has placed sustained downward pressure on the yen and upward pressure on Japanese bond yields, as market participants price in the likelihood of future rate hikes by the BOJ. The implications of this shift are significant for global capital flows and fixed income markets. Japanese long-term yields are now more aligned with those of other G10 economies, reducing the attractiveness of duration in yen-denominated assets. Foreign participation in JGBs has declined modestly, while domestic demand remains firm, underscoring a growing divergence in market sentiment. The BOJ’s next policy meeting, scheduled for January 2026, is now being closely scrutinized for signals of a tightening cycle. Market participants are adjusting their risk positioning across asset classes. Japanese equities have shown resilience, supported by strong corporate earnings, but the rising cost of borrowing could constrain future investment. Meanwhile, currency traders are recalibrating exposure to the yen, with forward rate agreements and options markets showing increased volatility around the 158–160 range.