Vanguard says that traders have underestimated the risk of rising Japanese government bond yields.

Vanguard Group Inc. stated that traders are betting that the Bank of Japan will raise interest rates this month, but they still underestimate the risk of Japanese rates needing to rise further to curb inflation. As investors bet that the Bank of Japan will raise rates at the meeting on December 18-19, Japan's 2-year government bond yield recently broke 1%, reaching its highest level since 2008. However, after years of sustained loose monetary policy, Japanese rates still remain much lower than in other G-10 countries, and Japanese inflation expectations are near the highest levels recorded since 2004. "The market underestimates the extent to which Japan needs to raise neutral rates to ease inflation pressure, so reducing Japanese bonds is the right approach," said Roger Hallam, Global Rates Manager at Vanguard, which manages $11 trillion in assets. "We still believe the Bank of Japan will continue to normalize and raise rates in December."