Japan's benchmark borrowing costs climbed to their highest level in thirty years on Tuesday, following signals from US Treasury Secretary Scott Bessent that he expects Tokyo to take action to stem the yen's decline. The yield on Japan's 10-year government bond rose 6 basis points during trading, breaching the 3% threshold for the first time since 1996, as investors closely monitored the country's upcoming draft budget.
Global bond markets came under broad pressure over the weekend after renewed military conflict broke out between the US and Iran, reigniting inflation concerns. Bond yields move inversely to prices. The yen was last trading at 160.1 per US dollar, marking its third consecutive trading session above the psychological 160 level, a threshold that many traders believe significantly raises the probability of official currency intervention if breached.
US and Japanese authorities conducted joint currency intervention in late July, but the yen has since weakened again. Speaking in an interview on Monday, Bessent said: "I have access to information the market doesn't have. I have confidence that both the Japanese government and the Bank of Japan will take measures to strengthen the yen."
According to Japanese public broadcaster NHK, Bessent met separately with Japanese Finance Minister Katsunobu Katayama and Bank of Japan Governor Kazuo Ueda, emphasizing the need for Japan to establish a clear fiscal sustainability path and proceed with interest rate hikes. Katayama told reporters at the same event that both countries agreed to continue coordinated action to promote "orderly movement" in the yen and maintain global market stability, adding that both sides stand ready to act should markets experience disorderly and sharp fluctuations.
Tokyo's growing unease over the yen's multi-year depreciation stems from the fact that a weaker currency raises import costs, adding further upward pressure on domestic inflation. Washington shares these concerns. Japan is the largest foreign holder of US Treasuries, and any large-scale selling of American debt by Tokyo to fund currency intervention would pose risks at a time when US long-term borrowing costs are already elevated. Turmoil in Japanese markets could also disrupt global markets and potentially undermine the dollar.
Takuji Okubo, managing director of Japan Macro Advisors, said Tuesday's rise in Japanese borrowing costs reflects market bets that the Bank of Japan will likely raise rates in September. He noted that markets may also be revising their expectations for the terminal rate of this hiking cycle upward, from 1.5% to 1.75% or even higher. "A 3% 10-year borrowing cost is historically high, but this merely represents Japan further departing from deflation and entering the norm seen in most global economies — where 2% inflation is an achievable target," Okubo said.
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