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By Vivien Lou Chen

A stronger yen and rising Japanese bond yields could pull capital away from the U.S. equity and bond markets

Bank of Japan governor Kazuo Ueda.

Bank of Japan governor Kazuo Ueda delivered a speech on Monday that was heard by investors all around the world.

The BOJ official caused a stir in global markets by suggesting that the central bank could raise interest rates again as soon as later this month. The remark caused Japanese bond yields to rise sharply, while yields on other global sovereign bonds, from the U.S. to Europe and the rest of Asia, quickly followed suit.

Speaking to business leaders in Nagoya, Ueda said that the BOJ “will consider the pros and cons” of raising its policy interest rate at its upcoming policy meeting, which ends Dec. 19. The central bank last raised interest rates to 0.5% from 0.25% in January, bringing borrowing costs to their highest level in 17 years.

Ueda’s remarks, which come at a time when the Japanese economy is experiencing a moderate recovery, triggered a global bond-market selloff that impacted debt trading in Australia and New Zealand, as well as in France, Italy, Greece and the U.S. In the bond market, yields move in the opposite direction to prices, and rise whenever government debt sells off.

“The Bank of Japan is finally signaling an end of an era after decades of ultraloose policy,” said Ryan Jacobs, founder of Florida-based advisory firm Jacobs Investment Management. “American investors should pay close attention. A stronger yen and rising Japanese yields could pull capital away from the U.S. bond and equities markets, tightening financial conditions globally.”

On Monday, Japan’s 2-year yield BX:TMBMKJP-02Y spiked just above 1% and its 10-year yield BX:TMBMKJP-10Y jumped to almost 1.88% – the highest levels in at least 17 years. Meanwhile, the yen (USDJPY) strengthened against the U.S. dollar DXY by about 0.5%.

Yields and currencies tend to move alongside interest-rate expectations for specific countries, and rising Japanese bond rates were stoking concerns about a possible replay of the August 2024 unwind of the yen carry trade, which created a wave of volatility across global markets.

In the U.S., yields on the 10-year BX:TMUBMUSD10Y and 30-year BX:TMUBMUSD30Y Treasurys spiked by 7 basis points each to 4.09% and 4.74%, respectively, data showed. Meanwhile, major U.S. stock indexes DJIA SPX COMP moved lower in afternoon trading.

Between 1999 and early 2024, Japan was known for keeping interests at rock-bottom levels, and even below zero for eight of those years, as it pursued a monetary policy aimed at combating persistent deflation and stoking economic growth.

Before Ueda’s comments on Monday, investors had been more focused on the prospect of aggressive fiscal stimulus under Japan’s first female prime minister, Sanae Takaichi, and the possibility that a subsequent rise in yields might make the country’s bond market look more attractive relative to the U.S. and the rest of the world. But on Monday, Ueda gave investors another reason to push Japanese bond yields even higher.

Read: Why trouble for the biggest foreign buyer of U.S. debt could ripple through America’s bond market

“The market went into the weekend with the expectation that, given the new prime minister in Japan, the BOJ might be more hesitant before deciding its next move. It turned out to be the other way around and the BOJ appears to be ready to hike in December,” said Daniel Tenengauzer, a senior macro analyst at InTouch Capital Markets in New York.

With the yen still undervalued, Ueda’s comments about a potential rate hike were creating a desire by some investors to rebuild long positions in Japan’s currency, according to Tenengauzer. “If the BOJ is somewhat more hawkish, people will want to price this in across other markets.”

The Bank of Japan was not the only thing impacting the Treasury market on Monday, however.

In Tenengauzer’s view, a quarter-point rate cut by the Federal Reserve next week has been mostly priced in, leaving traders with little else to do but unwind long-bond exposures. In addition, anecdotal economic information about the U.S. suggests that “maybe things are not as bad as expected,” he said.

Thirdly, President Trump announced over the weekend that he has made his choice on who will next lead the Fed, and prediction markets are betting that Kevin Hassett, the director of the National Economic Council, will be the president’s pick. Hassett is expected to support aggressive rate cuts, raising some concerns that this may end up inadvertently boosting inflationary pressures.

-Vivien Lou Chen

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  12-01-25 1348ET
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