- The benchmark 10-year Japanese government bond yield rose to 2.650%, as pressure from the currency market transmitted to the bond market, putting comprehensive pressure on fixed-income asset valuations.
- The USD/JPY exchange rate fell to the 162 level, marking a historic low since 1986, intensifying concerns about higher-than-expected imported inflation.
- Today, the Japanese Ministry of Finance auctioned approximately 2.8 trillion yen of two-year government bonds, while the newly appointed Bank of Japan committee member is seen by the market as leaning towards a dovish stance.
Currency Depreciation Triggers Sovereign Bond Market Selling Pressure
Constrained by a slight overnight rise in U.S. bond yields and the persistent decline of the yen in the foreign exchange market, the Japanese government bond market showed a clear outflow of funds on Tuesday. The USD/JPY exchange rate fell below the 162 mark, with this depreciation directly refreshing the historic low since 1986. This sharp marginal movement in the foreign exchange market quickly translated into concerns among fixed-income investors about an unexpectedly high rise in Japan's domestic inflation center. In his market report, Sony Financial Group's senior economist Yo Watanabe pointed out that as the yen approaches a 40-year low, market liquidity has expressed high concern about the possibility of the Bank of Japan being forced or passively delaying the normalization path of monetary policy. This policy uncertainty directly contributed to the main selling tone in the bond market that day.
Yield Curve Marginally Shifts Upward Across the Board
Under the strong selling sentiment, the Japanese government bond yield curve experienced an overall structural upward shift. The benchmark 10-year Japanese government bond yield rose by 2 basis points in early trading, reaching a level of 2.650%. Medium and long-term assets were not spared either, with the 20-year Japanese government bond yield simultaneously rising by 3 basis points, finally settling at 3.580%. In contrast, short-term government bonds showed relative resilience, with the two-year Japanese government bond yield remaining flat at 1.395%, while the five-year Japanese government bond yield slightly increased by 1 basis point to 1.880%. This long-end leading trend highlights the market's risk pricing for persistent forward inflation stickiness and high upstream energy costs.
Marginal Impact of Fiscal Supply Scale and Central Bank Personnel Changes
In addition to the external shock at the exchange rate level, pressure from the supply side of the bond market was also released on the same day. The Japanese Ministry of Finance plans to publicly auction approximately 2.8 trillion yen of two-year government bonds later today. Against the backdrop of generally cautious market sentiment and persistent upstream price pressures, this large fiscal supply scale poses a certain test to the liquidity tolerance of short-term government bonds. Meanwhile, the latest personnel appointments at the political level have added complex variables to the future policy direction. On Tuesday, the Suga government officially appointed Ayano Sato as a member of the Bank of Japan's Policy Board. Since Sato is widely categorized by the market as a representative supporting accommodative monetary policy, this appointment has somewhat alleviated market expectations of aggressive rate hikes by the central bank at the July meeting, but it has also deepened investors' long-term concerns about the yen's purchasing power.
