Japan Rate Hike Sparks Bond Market Turmoil

The Bank of Japan's potential interest rate hike is causing uncertainty in global financial markets. The nation's pursuit of increased defence spending is stoking concerns about fiscal discipline and sending sovereign bond yields to multi-year highs.

The 10-year Japanese bond yield hit a three-decade high of 3.03 per cent this week, while the 30-year bond yield traded at 4.1 per cent, nearing its own 30-year high. The sell-offs in bond markets came amid speculation that Japan would seek to boost military spending to 3.5 per cent of its gross domestic product from around 2 per cent.

A widely expected 25 basis-point interest rate increase by the Bank of Japan on Friday may further fuel the yield gains, potentially unleashing fresh sell-offs in long-end debt in the US and Europe already grappling with elevated yields.