Japan April core CPI rises 3.5% year-on-year, estimate +3.4%

Japan April core CPI rises 3.5% year-on-year, estimate +3.4%

Japan's long-term bond yields have surged dramatically in recent weeks, reflecting a complex interplay of factors including inflation, fiscal policy, and monetary tightening. The Bank of Japan (BOJ) has accelerated its quantitative tightening (QT) program, which has contributed to the sharp rise in yields, particularly for 30-year and 40-year Japanese Government Bonds (JGBs). According to Wolf Richter for WOLF STREET [1], the 40-year JGB yield jumped by another 11 basis points to 3.56% in April, marking a 100 basis point increase since the beginning of the month.

The spike in yields has significant implications for both bond holders and potential buyers. Investors who purchased 40-year JGBs at yields below 1% or even 0.5% in the past are now facing substantial price declines. The real yield of these bonds, which is the yield minus inflation, remains negative, making them an unappealing investment. The BOJ's QT program, which aims to reduce its holdings of JGBs, has contributed to the rising yields. Despite the fiscal challenges and high inflation, the 40-year JGB yield remains below the US 30-year Treasury yield, which briefly flirted with 5.0% earlier this month.

Japan's fiscal situation has been described as "extremely poor" by Prime Minister Shigeru Ishiba, with a debt-to-GDP ratio that has been worse than Greece's for many years. However, Japan's unique position as a major exporter of high-value manufactured goods and its substantial foreign-currency denominated securities provide some buffers against a potential fiscal crisis. The yen has depreciated against major currencies in recent years, which has added to the economic challenges.

The rising yields have also made the yen carry trade less attractive. Traditionally, investors borrowed at low short-term rates in Japan and invested in long-term JGBs, profiting from the difference in yields. However, the high long-term yields in Japan now offer an alternative to this strategy, potentially drawing buyers away from foreign markets like the US Treasury market.

The 10-year JGB yield has also risen, currently at 1.53%, which is less than half the rate of inflation, making it a negative real yield. The BOJ has reduced its holdings of JGBs by ¥25 trillion ($172 billion) since February 2024, bringing its holdings to ¥576 trillion ($3.98 trillion), the lowest level since December 2022.

The rising yields and fiscal concerns have raised questions about Japan's ability to manage its debt and inflation. The population of Japan is shrinking, with a decline of almost a million people per year, which could pose challenges for the economy in the long term. The financial mismanagement of government debt and taxation has been a long-standing issue in Japan, and recent developments suggest that the country may be approaching a "come to Jesus" moment, as described by Wolf Richter.

In summary, Japan's long-term bond yields have surged in response to rising inflation, fiscal concerns, and the BOJ's QT program. The implications for bond holders and potential buyers are significant, and the future of Japan's fiscal policy and monetary policy will be closely watched by investors and financial professionals.

References:
[1] https://wolfstreet.com/2025/05/20/japans-30-year-and-40-year-bonds-crater-yields-spike-huge-mess-coming-home-to-roost-yen-carry-trade-at-risk/