(May 20): Japan’s benchmark government bond yield climbed to the highest since 2013, amid expectations that the central bank is committed to normalising interest rates and supporting the struggling yen.

The yield on 10-year government debt rose 2.5 basis points to 0.975% on Monday, a level last seen when then newly appointed Bank of Japan (BOJ) governor Haruhiko Kuroda was starting his radical monetary easing.

Now under his successor Kazuo Ueda, the yield is edging towards the closely watched 1% mark, a far cry from the deeply negative levels seen as recently as 2020. Yields on debt due in 20 years to 30 years have also climbed to decade highs, encouraging Japanese investors to put more of their funds into domestic debt rather than markets in the US and Europe.

Investors are scouring data and policymaker statements to try to predict the BOJ’s next move. Pacific Investment Management Co (Pimco) sees the prospect of three more moves this year. Vanguard Group Inc’s head of international rates Ales Koutny expects hikes to around 0.75% by year end.

In contrast to the views of Pimco and Vanguard, AllianceBernstein Holding LP said last week that the BOJ is likely to favour reducing its vast balance sheet over increasing interest rates.

This matters for the currency market, because the huge gap in yields between Japan and the rest of the world has driven the yen to a 34-year low against the dollar. The yen was down 0.1% as of 11.55am in Tokyo on Monday.

Swaps pricing

The market for overnight indexed swaps is pricing about a 57% chance that the BOJ will lift rates by July, compared with around 50% odds at the start of May.

Goldman Sachs Group Inc strategists now predict Japan’s 10-year sovereign yield to rise to 2% by the end of 2026, on expectations the central bank will deliver a “prolonged” tightening cycle. The US bank expects the BOJ to raise interest rates to 1.25%-1.50% by 2027, according to a note last Friday from George Cole and Bill Zu.

“We think this rise in nominal yields will be led by rising inflation expectations, and real rates will be relatively contained,” they wrote. Still, “real rates in Japan are unlikely to fall from current levels, given the likelihood of hikes in response to higher inflationary pressure from here”.