Global interest rate "great reset" storm sweeping Japan: Japanese bond yields hit 30-year high, BlackRock warns of crowded short yen risk

The global bond market is undergoing a profound "interest rate reset" - with Japan being the most extreme epitome of this shift. On July 14, the yield on Japan's 10-year government bond rose by 1.5 basis points to 2.800%, reaching a near 30-year high of 2.900% intraday. The yen also fell to around 162 against the US dollar, marking its lowest level since 1986. BlackRock Investment Institute's latest commentary points out that this dual-line out-of-control situation confirms the reality and importance of the global interest rate reset. Global interest rate "big reset": Japan is no longer a "special case" Since 2020-2021, government bond yields in the United States, Europe, and Japan have all significantly increased. BlackRock points out that the repricing of hawkish policy expectations in the United States has further driven this trend. Currently, the implied long-term forward rates for Japanese government bonds are around 5%, for the US around 6%, and for Australia around 5.5%. Japan - historically seen as an exception due to long-term deflation and extremely loose monetary policy - is now gradually converging with other developed market countries. BlackRock believes that this confirms that the global interest rate reset is real and profound. Key variables driving this convergence include: a systematic rise in global term premiums - the additional compensation that investors require for holding long-term bonds is increasing; a surge in bond supply due to fiscal expansion in various countries - Japan's massive fiscal spending plan means that a large amount of new bond issuance will continue to suppress prices; and a structural upward shift in the inflation center. Bank of Japan: "Slow variables" cautiously hiking rates On June 16, the Bank of Japan raised its policy rate by 25 basis points to 1%, its highest level since 1995. However, Ben Powell, Chief Investment Strategist for the Middle East and Asia-Pacific at BlackRock, suggests that the Bank of Japan may proceed cautiously in further raising rates. Powell points out that strong domestic wage growth, solid underlying inflation, and deeply negative real interest rates support the case for tightening policy. The wage hike known as "shunto" has exceeded 5% for the third consecutive year, further strengthening the Bank of Japan's view of a benign cycle of wages and prices. On the external front, hopes for a cooling of tensions in the Middle East have eased the threat of ongoing energy shocks, helping to curb import-driven inflation. The market currently expects the Bank of Japan to maintain rates at 1% at the July 31 meeting, but most analysts still anticipate another rate hike to 1.25% by the end of the year. BNP Paribas expects the Bank of Japan to maintain a gradual tightening pace of raising rates every four to five months, with policy rates reaching 1.25% by the end of 2026, 2.00% by the end of 2027, and finally hitting the upper limit of 2.50% by September 2028. BlackRock's core strategy: underweight Japanese bonds, neutral Japanese stocks, watch out for yen shorts Against this macro backdrop, BlackRock outlines a clear three-pronged strategy: Maintain underweight position on Japanese government bonds. Powell explicitly recommends "underweighting Japanese government bonds." There are three reasons for this: prospects of further rate hikes by the Bank of Japan will continue to push up yields; rising global term premiums; and massive bond issuance continuing to pressure prices. This means that there is still room for bond prices to decline. Take a neutral stance on Japanese stocks (6 to 12 months). Although healthy corporate balance sheets and governance reforms provide support, import energy costs may weigh on returns. In the long term, BlackRock still maintains an overweight position, as inflation and wage trends support corporate profitability. Warn of crowded risk in shorting the yen. BlackRock strategist specifically warns, "the increasingly crowded short yen position deserves close attention." The yen plays a core role in global carry trades - investors borrow low-interest yen to invest in higher-yielding currency assets. When short yen positions become overly concentrated, any factor triggering short covering could lead to dramatic reversals. Singapore hedge fund Blue Edge even warns that without intervention or rate hikes, the yen may fall to 180 to 205 against the US dollar by the end of next year. Short-term disturbance: GPIF policy expectations trigger bond market roller coaster On Friday, July 10, Japanese Finance Minister Koizumi Kogochi stated that the government would explore measures to encourage the Government Pension Investment Fund (GPIF) to increase its investment in domestic financial assets. The GPIF is the world's largest pension fund, managing around $1.8 trillion in assets. The market quickly reacted - the yield on 10-year Japanese government bonds plunged by 17 basis points in a single day. However, Rinto Maruyama, senior strategist at SMBC Nikko Securities, pointed out that the market's reaction was excessive, and traders were just looking for buying opportunities. He estimated that the GPIF could increase its allocation to domestic bonds by up to 12.26 trillion yen, and even if 70% of this allocation was in 10-year government bonds and completed within three years, the 10-year yield would only drop by a maximum of 7 basis points. On Monday, July 13, the yield rebounded by 3 basis points to 2.79%. The end point of the interest rate reset is far from over BlackRock maintains its underweight position on Japanese government bonds while favoring Japanese stocks, as well as the short-term parts of the US and European yield curves, in search of lasting returns. The end point of the global interest rate reset is far from over. The implied long-term rates for Japanese government bonds suggest a level of around 5%, indicating that the current 2.8% yield on 10-year bonds still has significant upside potential. The gradual rate hikes by the Bank of Japan, the rising global term premiums, and Japan's massive bond issuance plan will continue to put pressure on Japanese bond prices. As BlackRock puts it, Japan is transitioning from a "deflation exception" to a "global norm." However, this process of convergence is inevitably accompanied by continued pains in the bond market and volatile fluctuations in the currency market. When the world's largest arbitrage trading currency faces the highest bond yields in 30 years, the market's next critical point may be closer than imagined.