Interest rate hike expectations boost Japan's 10-year government bond yields to a 17-year high. Will the next step be a strong surge in the yen?

The benchmark risk-free rate in Japan - the yield on the 10-year Japanese government bond - climbed to its highest level since 2008 on Monday. At the same time, the yield on comparable U.S. bonds declined once again, highlighting the rapid rise in market expectations for the Bank of Japan to continue raising interest rates in the near future. With the 10-year Japanese government bond yield reaching a seventeen-year high, against the backdrop of numerous global central banks, including the Federal Reserve, the European Central Bank, and the Reserve Bank of Australia, continuing to cut interest rates, market expectations for the Bank of Japan's ongoing interest rate hikes are reshaping the Japanese bond market landscape. This is driving the expansion of Japanese government bond yields, and the long-term weak yen is also expected to benefit from the boost provided by strong government bond yields. Statistics show that with the fastest wage growth in over thirty years supporting the Bank of Japan's gradual path of interest rate hikes, the risk-free rate briefly touched 1.575%, the highest level in seventeen years. Weak demand in the auction of five-year Japanese government bonds further reinforced the upward trend in the 10-year Japanese government bond yield. Investors are generally betting on the continued rise of benchmark interest rates and the yield curve of government bonds of various maturities, pausing their purchase of new government bonds. The trends in the Japanese government bond market stand in stark contrast to the U.S. bond market - with the backdrop of economic uncertainty caused by Trump's tariff policy, prices of U.S. government bonds across all maturities have strengthened, indicating a sharp decline in U.S. bond yields. Although according to the latest market surveys, economists generally expect Bank of Japan officials to keep rates unchanged at the meeting ending on May 1, overnight index swaps show an 85% probability of a rate hike announcement at the Bank of Japan's meeting in July, with a near certainty of continued rate hikes until September. Wall Street financial giant JPMorgan recently raised its year-end forecast for 10-year Japanese government bond yields from 1.55% to 1.7%. Some domestic institutional investors in Japan expect this yield to possibly climb to 2%, which, if true, would mean that Japanese long-term sovereign bond yields will no longer be the lowest among major global markets. "The market has begun to anticipate that the Bank of Japan may announce rate hikes earlier than in May - that is, the Bank of Japan may unexpectedly announce rate hikes in March or May, and investors are gradually realizing that the policy meeting in May will not be as calm as expected," said Kei Fujiwara, head of fixed income department at Resona Asset Management. For the yen, if the 10-year Japanese government bond yield continues to rise along with interest rate hike expectations, the yen may experience a "bull market appreciation curve" in the foreign exchange market. For a long time, the core factor behind the weakness of the yen exchange rate has been that under the backdrop of negative interest rate policies, Japanese long-term government bond yields have been significantly lower than those of Western countries. However, since the beginning of this year, this yield differential has undergone significant change. The path of interest rate cuts in Western countries such as the United States is becoming clearer, while expectations for interest rate hikes by the Bank of Japan continue to rise, leading to a sustained narrowing of the yield differential between 10-year government bonds in Western countries and Japan. This narrowing trend is likely to drive the significant amount of funds that have long been shorting the yen in the foreign exchange market under the logic of the Bank of Japan's interest rate hike expectations and the rise in Japanese government bond yields to switch to yen long positions. Meanwhile, Western central banks such as the Federal Reserve will see their exchange rates and yield curves trend downward due to the logic of interest rate cuts. This is particularly true for the USD/JPY curve, which may enter a "prolonged downturn" due to the Trump administration's "tariff storm" causing an expectation of "stagflation" in the U.S. economy - meaning that the long-term softness of the dollar against the yen may lead to a significant appreciation trend.