Following the release of the Bank of Japan’s July meeting Summary of Opinions, the yield on 2-year bonds in Japan’s domestic bond market rose to 1.62%, reaching its highest level in approximately 31 years, since 1995. Several board members indicated the possibility of accelerating the pace of rate hikes, strengthening expectations for an additional hike at the next meeting in September.
In Japan’s domestic bond market, the yield on newly issued 2-year Japanese government bonds temporarily reached 1.62%, up 0.02 percentage points from the previous Friday and its highest level in 31 years. The 5-year bond yield temporarily rose to 2.095%, setting a record high. The yield on newly issued 10-year Japanese government bonds, the benchmark for long-term interest rates, ended trading at 2.805%, after rising to as high as 2.810% during the morning.
The Bank of Japan’s Summary of Opinions from its July meeting showed heightened concern about upside inflation risks and a more supportive view of accelerating the pace of rate hikes. One board member said that “greater consideration than before should be given to the risk of inflation overshooting” and indicated that, depending on economic, price and financial conditions, “the pace of rate hikes could become faster than the market expects.” Another member went further, saying that it was “necessary to pick up the pace” of rate hikes.
In the market, expectations that an additional rate hike will be decided at the next meeting in September have strengthened rapidly, with selling particularly evident in medium-term bonds. The rise in 5-year bond yields also spread to long-term rates, contributing to higher 10-year bond yields.
Rising domestic interest rates could affect companies’ funding costs and mortgage rates, as well as contribute to a correction in elevated stock market valuations. As market participants assess the BOJ’s next move, nervous trading is likely to continue in the bond market for the time being.