Eseandre Mordi
⬤ Japan's two year bond yield touched 1.067 % this week, a level last seen just before the 2008 Global Financial Crisis. The yield keeps climbing because investors now expect the Bank of Japan to keep tightening policy. After more than a decade near zero, the sharp rise during the past year shows how completely expectations have changed.
⬤ The chart is striking. Between 2009 and 2021 the yield stayed at zero or slightly below. A gentle rise began then turned into a steep climb through 2023 and 2024. Today's gain of 0.017 percentage point looks small - yet it forms part of a move that has lifted the yield to its highest point in over fifteen years.
The current level marks a clear break from the long period of ultra loose policy.
⬤ The significance becomes clear when we compare earlier cycles. The last time the two year yield stood here, the world stood at the edge of the 2008 crisis plus markets foresaw higher rates and rising credit risk. Yields back at those levels now show that investors are reappraising Japan's economic prospects and the likely path of inflation.
⬤ The story reaches beyond Japan. The jump in short term yields can spread to currency markets, global bonds but also overall risk appetite. For years Japan supplied cheap funding to investors everywhere - a sharp rise in its yields alters the arithmetic behind carry trades and capital flows. The Bank of Japan's reaction to the next batch of economic data will decide whether the climb continues or stalls.
Eseandre Mordi
