Japanese Bond Yields Hit 30-Year High Amid Rate Hike Bets

Japanese government bond yields surged to their highest levels since the mid-1990s, with the benchmark 10-year yield hitting 2.945% on August 18. This 30-year peak follows a massive sell-off driven by investor speculation that the Bank of Japan will raise interest rates during its September 17-18 meeting, with markets pricing in an 80 percent probability of a 25-basis-point hike.

The yield spike occurs despite second-quarter GDP growing at an annualized rate of only 1.1%, missing economist expectations of 2.0% due to flat private consumption and declining capital expenditure. However, the GDP deflator remained at 2.6%, staying above the central bank's 2% inflation target and supporting a hawkish policy shift. The Japanese yen also strengthened 0.2% against the U.S. dollar to approximately 159.055, influenced by expectations that the Federal Reserve may hold U.S. rates steady in September.

Fiscal anxiety has further pressured bonds, as investors react to Prime Minister Sanae Takaichi's expansionary policies and a proposed two-year sales tax cut on food. Global factors, including rising oil prices linked to conflict in the Middle East and an AI-driven investment boom, have contributed to the slide in debt. The impact has already reached consumers, with megabanks like MUFG Bank raising fixed-rate home loan costs to their highest levels since 2006.