Japan’s 10-year government bond yield climbed to its highest level in nearly three decades on Monday, even as new economic data showed growth slowed sharply in the second quarter and came in well below economists’ expectations.
The 10-year Japanese government bond yield reached 2.93 percent during trading, its highest level since September 1996, before easing slightly after the release of the gross domestic product figures.
Japan’s economy grew at an annualised rate of 1.1 percent in the second quarter, according to Cabinet Office data. The result was significantly below the 2 percent forecast and followed a downwardly revised 1.9 percent expansion in the first quarter.
On a quarter-on-quarter basis, GDP increased 0.3 percent, compared with expectations for growth of 0.5 percent. It was the third consecutive quarterly expansion.
Domestic demand remained weak. Private consumption was unchanged, while capital spending dropped 1.2 percent. Net exports provided support, contributing 0.5 percentage points to economic growth as a weaker yen helped exports.
The combination of weak growth and rising bond yields has highlighted the growing importance of inflation and currency movements in Japan’s financial markets.
The GDP deflator, a broad measure of price changes across the economy, rose 2.6 percent from a year earlier. Investors are increasingly expecting the Bank of Japan to raise its policy rate, currently at 1 percent, potentially as early as September.
A higher policy rate could help contain inflation and support the yen, which has faced significant pressure against the US dollar.
The yen fell to 163.73 against the dollar in late July, reaching its weakest level in about four decades. Japan and the United States responded with their first joint currency intervention since 2011.
Japan reportedly spent around $85 billion during the first two days of the intervention, while the US contribution was considerably smaller, according to Goldman Sachs. The operation helped push the yen back toward 159 per dollar.
The interest-rate gap between Japan and the United States remains wide. The Federal Reserve’s benchmark rate currently stands between 3.50 percent and 3.75 percent, compared with Japan’s 1 percent policy rate.
Markets are closely watching the Bank of Japan’s September meeting for signs of further monetary tightening.
Japan’s bond market also has global implications because of the yen carry trade. Investors can borrow yen at relatively low interest rates and use the funds to buy higher-yielding assets in other markets.
Rising Japanese bond yields can reduce the appeal of that strategy and encourage investors to unwind positions. A similar adjustment in August 2024 contributed to sharp market losses, with the Nikkei falling more than 12 percent in one session.
With Japanese bond yields now at three-decade highs and further rate increases under consideration, investors remain alert to the possibility of renewed volatility in global financial markets.
