How will Japan’s rate increase affect capital flow in global financial markets?
Tokyo’s bond yields are seeing multi-decade highs as Bank of Japan boosts borrowing cost to three-decade high
Japan is adding a fresh layer of uncertainty to global financial markets by potentially triggering a new bout of turmoil in bond markets and dampening the appetite for risk assets, as Tokyo’s pursuit of bigger government spending stokes concerns about fiscal discipline and sends sovereign bond yields to multi-year highs.
The nation’s 10-year bond yield hit 3.03 per cent this week, a level not seen in three decades, while 30-year bond yields traded at 4.1 per cent, also nearing a 30-year high. The sell-offs, in which bond prices move inversely with yields, came amid speculation that Japan would seek to boost its defence budget to 3.5 per cent of its gross domestic product from around 2 per cent.
An increase in risk-free interest rates typically dents investors’ appetite for assets such as stocks by demanding a higher risk premium, draining funds that spawned the frenetic artificial intelligence trade that has buttressed the bull market over the past few years.