Surging oil prices and Takaichi government's food tax cut fuel long-term rate spike

A traffic sign stands in front of the Bank of Japan headquarters in Tokyo on June 15. [Reuters]
A traffic sign stands in front of the Bank of Japan headquarters in Tokyo on June 15. [Reuters]

Japan's 10-year government bond yield climbed to its highest level in three decades amid growing expectations that the Bank of Japan will raise its benchmark interest rate.

The yield on the 10-year Japanese government bond rose to 3.035 percent in Tokyo bond markets on Tuesday, its highest since August 1996, according to the Nikkei and the Yomiuri Shimbun. The surge was attributed to a sharp rise in crude oil futures prices driven by deteriorating conditions in the Middle East, which stoked inflation concerns and reinforced expectations that the BOJ would accelerate rate hikes.

However, the Nikkei noted that two competing views exist: one holds that faster BOJ rate hikes would ultimately stabilize long-term rates, while the other argues that the market's upward revision of the BOJ's expected terminal rate is itself pushing long-term yields higher.

Within the BOJ, some officials believe that rate hikes will contain inflation risks and thereby stabilize long-term rates. Markets, however, see the BOJ's accelerating rate hikes as adding further upward pressure on long-term yields.

The Takaichi government's decision to cut the consumption tax on food is also seen as a factor fueling long-term rate increases by raising fiscal concerns. On Tuesday, the Japanese government formally decided at a Cabinet meeting to lower the consumption tax rate on food to 1 percent for two years starting next April.

The Nikkei noted that if long-term rates continue to rise, anxiety over the economy and public finances could deepen, and the Takaichi administration may move to restrain the BOJ from raising rates further.

The rise in long-term yields is not limited to Japan. The US 10-year Treasury yield climbed to 5.041 percent on Tuesday (local time), its highest since July 2007. Germany's long-term rate also surpassed 3.5 percent, a 17-year high, while the United Kingdom's reached the 5.4 percent range, a 19-year high.


yckim6452@heraldcorp.com