Highlights

  • 2Y bond yields rose to their highest level since 2008 on hopes of a rate hike by the BOJ.

  • We maintain our projection of a BOJ rate hike of 25 bps later this month and another similar move next year.

  • Rising yields in the long term might increase the appeal of local bonds for Japanese investors, who currently find foreign bonds more attractive.

Line chart plotting Japan's 2‑year government bond yields from 2007 to Dec 2025, showing peaks in 2007, prolonged decline into near‑zero and negative levels around 2013–2016, then a gradual recovery with sharp acceleration from 2022–2025 to reach the highest level since 2007.

In this edition

Yields on Japan’s two‑year bonds touched their highest levels since 2007, on market expectations of a rate hike later this month. While the short end (2‑year) is more sensitive to policy‑rate moves, yields on 10‑year and 30‑year bonds have also risen amid concerns about the government’s expansionary fiscal policy and high public‑debt levels. The Bank of Japan (BOJ) aims to control inflation and to signal its independence to markets. The BOJ would also like to control the pace of any sudden yen depreciation through credible policies, and it seems the Bank has convinced the Takaichi administration of this. We continue to expect a rate rise in December and another around mid‑2026. The timing will largely depend on exchange-rate developments, as economic fundamentals appear to be mature enough to warrant further tightening. Additionally, we believe that even after this expected hike, financial conditions are likely to remain accommodative.

*Fiscal expansion/easing refers to an increase in government spending and/or reduction in taxes to stimulate economic growth

Key dates


8 Dec

EZ Sentix investor confidence, NY Fed inflation expectations

 


10 Dec

FOMC rate decision, Brazil Selic Rate, China CPI

 


12 Dec

Germany CPI, France CPI, India CPI

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