Japan long-term interest rates surge amid BOJ tightening speculation #JapanFinance

Long-term interest rates have surged recently in Japan on speculation that the Bank of Japan will further tighten monetary policy, raising the prospect of higher borrowing costs for households and companies.

The yield on the benchmark 10-year Japanese government bond hit a 16-year high of 1.575 percent on March 10, but banks and other investors have become more cautious about buying the asset as they are unsure about how far the central bank plans to raise rates.

Photo taken in July 2023 shows the Bank of Japan headquarters in Tokyo. (Kyodo)

The recent spike in the key barometer of long-term interest rates came after the BOJ hiked its key short-term rate to 0.5 percent from 0.25 percent, its highest level in about 17 years, at its policy meeting in late January.

After the policy decision, BOJ Governor Kazuo Ueda said the central bank will continue to raise the policy rate if the economy and prices move in line with its expectations, fueling speculation of further monetary tightening.

Following the meeting, the key long-term bond yield, which was moving around 1.1 percent late last year, started climbing rapidly as the market judged the BOJ was keen to make additional rate hikes.

The rise in long-term rates accelerated further after some BOJ policymakers made remarks indicating they are positive about the prospect of further policy normalization as the central bank moves away from a decade of unorthodox monetary easing.

Reflecting expectations of higher interest rates, which move inversely to bond prices, results of recent government bond auctions have been sluggish.

In the auction for 10-year bonds on March 4, the Finance Ministry offered 5.27 trillion yen ($35 billion) worth of bonds but attracted only 1.98 trillion yen in bids.

Rising interest rates have already started influencing banks in setting mortgage rates. MUFG Bank set the prime rate for its 10-year fixed mortgage at 1.61 percent in March, much higher than 0.98 percent a year earlier.

Takahide Kiuchi, an executive economist at the Nomura Research Institute, said the recent increase in long-term interest rates has been “excessive,” adding that the BOJ could become cautious about further monetary tightening.

The BOJ may face the need to be considerate of the economy amid growing uncertainty about the global economy, as the United States imposes tariffs and other countries retaliate with countermeasures, Kiuchi said.

Related coverage:

Japan’s real wages fall 1.8% in January, first drop in 3 months

Yield on 10-yr Japan gov’t bond hits 1.515%, highest since June 2009

Yen hits 2-month high in 149 zone vs. dollar on BOJ rate hike bets