Against a backdrop of expectations for an additional Bank of Japan rate hike, long-term interest rates have risen in the Japanese government bond market, with the 10-year yield reaching a high level. The article explains how rate hikes affect government bond prices and yields, the differences between short- and long-term bonds, and developments in Japanese government bonds for retail investors.
As expectations of a Bank of Japan rate hike spread, the Japanese government bond market has seen a notable rise in long-term interest rates, with the 10-year government bond yield reaching 2.945% on 18 August. This has focused market attention on rising long-term rates and renewed awareness of the relationship between price movements and yields on outstanding bonds.
Short-term government bonds are more sensitive to policy rates, while long-term government bonds are influenced by multiple factors, including inflation expectations and fiscal supply and demand. The 2-year yield rose to around 1.7% at one point, and expectations of an additional rate hike at the September Bank of Japan meeting are said to have the potential to affect long-term interest rates.
The Bank of Japan is gradually reducing its purchases of government bonds, prompting views that market forces are playing a greater role in determining long-term interest rates. On 24 August, the Ministry of Finance released the results of an auction of 10-year Climate Transition Interest-Bearing Government Bonds, among other developments in supply and demand that also affect government bond yields.
For Japanese government bonds for retail investors, the interest rate on Floating-rate 10-year JGBs is reviewed every 6 months, with an initial rate of 1.87%, while Fixed-rate 5-year JGBs and Fixed-rate 3-year JGBs are offered at 2.06% and 1.71%, respectively. Floating-rate 10-year JGBs may benefit in a rate-hiking environment, whereas the interest rate on fixed-rate products remains fixed. The adjustment amount applied when bonds are redeemed before maturity should also be taken into account.
In summary, rate hikes tend to push government bond yields higher, but long-term interest rates also move in response to inflation, fiscal policy, supply and demand, overseas interest rates, and other factors. Price movements should therefore not be assessed solely on the basis of rate hikes. The focus will be on how upcoming Bank of Japan meetings, economic indicators, and calendar announcements affect market expectations.