Japanese Government Bonds Yield Surges 5% on U.S. Policy Shift Concerns

In the wake of the United States President's attempt to remove a member of the Federal Reserve Board, the yield on Japanese government bonds surged to a historical high on Tuesday. This move has raised concerns in the market that if the Federal Reserve shifts to a more accommodative policy stance, inflationary pressures could intensify.

The yield on 30-year Japanese government bonds rose to 3.215%, matching the highest level seen on Monday, driven by a 5 basis point increase in the yield on U.S. Treasuries following the President's announcement. The market expects that if the Federal Reserve prioritizes the labor market over controlling consumer prices, inflation levels could rise, leading to an increase in long-term U.S. Treasury yields. However, short-term U.S. Treasury yields, which are more sensitive to monetary policy prospects, fell by 4 basis points.

The unprecedented high yield on Japanese super-long-term bonds complicates the Japanese government's goal of managing its debt burden. Currently, Japan's government debt stands at approximately 250% of its gross domestic product (GDP), the highest among developed nations. The Finance Minister has stated that the Ministry of Finance will closely monitor the bond market and take appropriate debt management measures.

Japan's Ministry of Finance plans to request over 32 trillion yen (approximately 217.2 billion USD) in debt repayment funds for the next fiscal year, setting a new historical high. An independent macroeconomic strategist and former advisor to the Financial Services Agency, Harry Ishikawa, commented, "The situation is indeed grim. The Ministry of Finance will attempt to control the rise in yields, possibly by adjusting the scale of bond issuance or other means."

As the world's largest creditor nation, Japan's sovereign bond yields are among the lowest globally, making its market highly sensitive to rate changes in other markets. By the end of 2023, Japan held 2 trillion USD in U.S. assets, a figure that continues to grow as U.S. bond yields rise. Japanese investors seek higher returns by investing overseas, while foreign investors engage in carry trades, borrowing low-interest yen to invest in higher-yielding assets. These factors cause Japanese government bond yields to move almost in tandem with U.S. Treasury yields.

It remains uncertain whether the member will be successfully removed, as they have challenged the President's authority to do so, stating in a declaration, "From a legal standpoint, there is no valid reason for removal." Nevertheless, the pressure exerted by the President on the member has intensified efforts to influence the direction of monetary policy, further eroding market confidence in U.S. sovereign debt as a "safe haven" investment.

For the Japanese bond market, this is not welcome news. In recent days, the yield on Japanese super-long-term bonds has been setting new highs almost daily, driven not only by the rise in U.S. Treasury yields but also by market concerns over Japan's domestic fiscal discipline. Last month, the ruling coalition suffered a significant defeat in the upper house elections, giving the opposition, which advocates for deficit financing to lower consumption taxes, greater influence.

Additionally, the refusal of the Prime Minister to resign has raised market concerns about potential delays in discussions on supplementary budgets. "If there are no buyers, bond yields will continue to rise slightly, and currently, no investors are willing to purchase 30-year Japanese government bonds," said Shoki Omori, Chief Trading Strategist at Mizuho Securities. Omori further added, "If the market expects the Federal Reserve to allow inflation to rise, U.S. long-term Treasury yields will face upward pressure, and this pressure will be transmitted to global markets. The Federal Reserve now appears to be less of an independent institution."