04.12.25 - Rising yields in Japan

Japan’s 10-year government bond yield climbed above 1.94% today, the highest level since 2007. The move reflects increasingly firm expectations that the Bank of Japan (BoJ) may raise interest rates this month, moving away from decades with ultra-loose policy.

Expectations intensified after BoJ Governor Kazuo Ueda voiced confidence in Japan’s economic momentum and reiterated that the central bank will carefully evaluate the costs and benefits of a rate hike and act when appropriate.

A key driver remains the ongoing weakness of the yen, with USD/JPY trading above 155, a level that has historically triggered discomfort among policymakers.
Persistent currency depreciation increases import costs, fuels domestic inflation pressures, and raises the likelihood of monetary tightening.

Markets: increasing nervousness from leveraged investors with yen-loans

• JPY started to stabilize this week after long weakening cycle

• Japan Bond yields: higher with the 10-year yield above 1.94%

• Japan Stock Market: larger swings during last trading sessions

My View: The weak yen is becoming a structural issue for Japan and for global markets.

For years, investors tapped ultra-cheap yen loans to finance higher-yielding assets worldwide. If the BoJ now raises rates, these borrowers face rising funding costs, creating pressure to unwind positions. This can trigger forced selling, reduce liquidity, and amplify volatility across asset classes — not only in Japan but globally.

We have witnessed parts of this dynamic earlier this year: April’s sudden volatility and this week’s sharp intraday moves serve as reminders of how sensitive markets are to shifts in Japan’s monetary stance.

A rate hike would mark a fundamental shift:

• the end of an era of nearly cost-free yen borrowing,

• the re-pricing of the global carry trade,

• and renewed pressure on risk assets that benefited from abundant leverage.

In general, higher interest rates in Japan could lead to a stronger Yen which is usually negatively correlated to Japanese stocks.

The next BoJ monetary-policy meeting is scheduled for the 16-18 December and the announcement for Friday December 19 with the potential to rise rates by 25bps from currently 0.5% to 0.75%.

The BoJ sits at a critical juncture. Any move to tighten policy risks unleashing broader market adjustments, and the current backdrop of weak yen, rising yields, and leveraged positioning increases that risk.

Become a member to access more valuable market updates like this