Interest rate hike expectations and fiscal concerns weigh heavily, pushing Japan's 10-year government bond yield to a 30-year high.

Affected by fiscal concerns and the market's rising expectations for future interest rate hikes by the Bank of Japan, Japanese bond prices fell on Monday. The yield on 10-year Japanese government bonds rose by 5.5 basis points to 2.93%, the highest level since 1996. Meanwhile, the yield on 30-year government bonds also increased to 4.06%, close to the record high reached in May. Informed sources revealed last week that the government led by Prime Minister Sanae Takaichi supports recent interest rate hikes by the Bank of Japan, with the next hike possibly occurring in September or October. Additionally, concerns about financing a two-year food consumption tax reduction plan, for which the Japanese government has not yet clarified funding, have also put pressure on Japanese bonds. Ryotaro Kimura, senior bond strategist at BNP Paribas Asset Management, stated, As investors return to the market after the holidays, market liquidity improves, and the bond market begins to digest the expectations of accelerated interest rate hikes by the Bank of Japan. Unless Takaichi's government abandons its expansionary fiscal policy, any decline in yields is likely to be gradual, meaning investors need not worry about missing buying opportunities. The yield on 10-year Japanese government bonds has risen to its highest level since 1996. Global market expectations for further tightening of monetary policy are increasingly threatening the bond market. Major central banks are facing multiple pressures, including rising oil prices due to the war in Iran, significant increases in government spending, and economic growth driven by a surge in investments in artificial intelligence. At the same time, data released on Monday showed that Japan's real GDP grew by 0.3% quarter-on-quarter in the second quarter, translating to an annual growth rate of 1.1%, which is far below market expectations. This result may complicate the Bank of Japan's policy communication as it weighs the timing of the next interest rate hike. Nevertheless, these data are unlikely to derail the Bank of Japan's path to raising interest rates. Overnight swap market pricing indicates that traders believe there is an 80% chance of a rate hike at the next policy meeting on September 18. Following the release of Japan's GDP data, the yen strengthened slightly, rising from about 159.21 yen per dollar before the announcement to 159.04 yen per dollar. Since the US-Japan coordinated intervention in the currency market at the end of July, the yen's gains have narrowed, and it remains significantly below its 10-year average exchange rate of 126.09. Naoki Hattori, chief Japanese economist at Mizuho Research Institute, stated, In light of the US-Japan coordinated intervention in July, I believe the external environment also puts pressure on the Bank of Japan to raise interest rates. Given all these factors, I still consider a rate hike in September to be the main scenario.