“There are lingering concerns that the BOJ is behind the curve,” said Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management Co. “This has likely prompted investors to shy away from two-year bonds, which are most affected by such risks.”
Yields on two-year Japanese government bonds rose to their highest level since 1996 after a weak auction. Investors are concerned that the Bank of Japan may have to raise rates more aggressively to combat inflation and strengthen the yen.
The 10-year breakeven inflation rate – a key measure of market expectations for future price pressures – jumped this week to the highest level in data going back to 2004.
Still, the yen’s depreciation and rising yields have calmed since the start of the week after Japanese Finance Minister Satsuki Katayama warned that Japan has a “free hand” to take bold action against currency moves that are out of line with fundamentals.
Investors will pay attention to the government’s bond issuance plans linked to the 2026 budget, which is expected to be approved by the Cabinet on Friday. Japan’s Primary Dealers said this month that more issuance of two-, five- and 10-year government bonds is desirable for the next fiscal year starting April 1, while calling for a reduction in super-long debt sales.
Japan is likely to cut new issuance of super-long government bonds next fiscal year to about 17 trillion yen ($109 billion), the lowest level in 17 years, Reuters reported, citing two unidentified government officials.
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