Japan's Bond Yields Surge to Highest Since 1996 Amid Global Selloff

Japan's 10-year government bond yield soared to its highest since 1996, joining a global selloff. The yield rose by 10 basis points to 3.075% on Thursday after the Silver Week holidays. This surge was driven by an intensifying selloff in Treasuries, where robust US economic data and weak demand at a debt auction pushed yields across much of the curve to their highest levels in almost two decades.

Rising oil prices added to inflation concerns and reinforced expectations for further Federal Reserve interest-rate hikes. Domestic pressures are also contributing to the selloff, as the Bank of Japan raised its benchmark rate on Friday and left the door open to further tightening.

Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management, warned that the BOJ risks falling behind the curve on inflation. This concern is fueled by two dissents against last week's rate increase and the absence of a proposal for a larger 50-basis-point move.

The government's consideration of a new mid-term defence spending target of 3.5% of GDP has also added pressure further out the curve, as it raises questions about how additional expenditure would be financed.