Japan Yields Soar as Middle East Uncertainty Fuels Inflation Fears

Japan's government bond yields rose on Wednesday as crude oil prices increased due to renewed uncertainty over the Middle East, adding to inflation concerns. The benchmark 10-year JGB yield rose 1.5 basis points to 2.820%, while the 5-year yield also reached a record high of 2.100%. The 2-year yield, the tenor most sensitive to Bank of Japan policy rates, increased 2 basis points to 1.63%, its highest level since May 1995.

The move higher in yields came against a backdrop of fresh geopolitical strain. Iran's top security official said that the Strait of Hormuz will remain closed unless the United States accepts Iran's conditions for ending the conflict, including the release of Iran's frozen assets and an end to wars across the region.

Keisuke Tsuruta, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities, noted that external conditions are likely to remain a headwind, citing recent rises in US long-term yields, crude oil futures, and the dollar against the yen. The rise in JGB yields has yet to provide any meaningful support for the yen.

Traders are increasing bets on further BOJ tightening, with Tokyo Tanshi data showing a 66% chance of a rate hike at the September meeting as of Monday afternoon.