Middle East conflict escalation rekindles inflation fears, Japanese 10-year government bond yields surge to new highs since 1997.

As President Trump announced that the United States will impose a comprehensive maritime blockade on the strategic chokepoint of the Hormuz Strait, tensions in the Middle East escalated further. The yield on Japanese 10-year government bonds climbed to its highest level since 1997. On Monday in the Tokyo market, the benchmark yield rose by 5.5 basis points to 2.49%. The 10-year government bond futures fell by 55 basis points to 129.27 at one point, while the 5-year government bond yield rose by 4 basis points to 1.9%. Over the weekend, negotiations between the United States and Iran failed to reach an agreement to end the Middle East conflict, causing market expectations for the fragile ceasefire reached last week to be shattered. The tension escalated again, driving up oil prices and exacerbating inflation pressure on Japan, which heavily relies on energy imports from the Middle East. The continued weakening of the yen further increased import costs and heightened inflation risks. The current exchange rate of the yen is approaching the 160 yen per US dollar level again, prompting Japanese officials to enhance verbal intervention. Finance Minister Kaori Kaneko stated that authorities are prepared to take "comprehensive actions" in the market, considering the impact of exchange rate fluctuations on households and the economy. Rinto Maruyama, senior foreign exchange and interest rate strategist at Sumitomo Mitsui Banking Corporation Nikko Securities, pointed out: "The escalation of tensions in the Middle East has increased the likelihood of the Bank of Japan's difficulty in raising interest rates at the April meeting. If authorities do not signal interest rate hikes in the market this week, with expectations that the central bank will 'lag behind the curve,' yields may continue to rise." Overnight index swaps show that the market's probability of a rate hike by the Bank of Japan in April is about 54%, and by July, a 25-basis-point hike has already been fully priced in.