Japan Government Bond 3Y

Japan's Ministry of Internal Affairs and Communications revealed on October 2 that the core consumer price index, or core CPI, for Tokyo, which excludes fresh food prices, rose 2.7% in September year on year, higher than the 2.3% analysts had expected and up from 1.8% in August. It was the first time since January this year that Tokyo's core CPI stood above the Bank of Japan's 2% inflation target. Meanwhile, the effects of some temporary government subsidy measures have begun to fade. The core CPI that excludes both energy and fresh food prices, a key underlying inflation gauge, jumped 3% in September, accelerating from 2% in August. The data may heighten the Bank of Japan's concern over the risk that inflation will remain on an upward trend and could exceed its 2% target, which would prompt the central bank to consider the appropriate timing for another interest rate hike, after it had just raised rates by 0.25% to 1.25%, the highest level in 31 years, at its meeting on September 18. The Bank of Japan's policy board said in a statement that the increase was driven by the risk that inflation could surge above the 2% target, and that the central bank aims to keep underlying inflation stable at around 2%, while signalling that it will continue to raise its policy interest rate and adjust the degree of monetary easing in line with changes in economic activity, prices and financial conditions.

The Japanese Yen weakened about 0.5% against the US Dollar, lifting USD/JPY to 158.44, after the Bank of Japan's Summary of Opinions disappointed expectations for an October rate hike. MUFG's Lee Hardman reported the move, which followed the release of the central bank's summary of opinions. The fading of October hike bets drove the currency pair higher. The Yen's roughly 0.5% decline against the Dollar marked the session's key development for the pair.

Bank of Japan policymakers signaled increased support for faster monetary tightening, according to the summary of opinions from the central bank's September meeting. Several members advocated for quicker rate hikes or moving rates closer to the neutral target in the near term, with multiple policymakers noting that underlying inflation is approaching or at the 2% target. One member suggested accelerating tightening if inflation risks overshoot forecasts, and officials warned of ongoing price pressures and upside risks from elevated crude oil prices linked to Middle East tensions. The signals follow September's rate hike to 1.25%, after which the BOJ governor emphasized a heightened focus on preventing inflation from overshooting the central bank's targets. Despite the prospect of tighter policy, the Nikkei 225 Index jumped 2.4% to above 68,000 on Thursday, its highest level in six weeks, while the Japanese yen weakened past 158 per dollar.

The Japanese yen strengthened past 157 per US dollar and was the best-performing currency in the G10 group, gaining as much as 0.6% to touch 156.38 per dollar in Asian morning trading on September 30, 2026, after the Japanese government issued repeated warnings about the yen's weakness, with end-of-quarter capital flows also lending support. Atsushi Mimura, Japan's senior currency policy official, told Reuters that the prime minister and finance minister of Japan, as well as the United States, had sent very clear signals about the currency's weakness. Japanese Prime Minister Sanae Takaichi said US President Donald Trump expressed concern about the yen's weakness during their talks last week. Markets have increased bets that the Bank of Japan, or BOJ, may raise interest rates again as early as next month, after the BOJ lifted its policy rate to 1.25% earlier in September. The yen has now strengthened by about 3.6% since the start of this quarter, after the Japanese and US governments jointly intervened in foreign exchange markets in July to prop up the currency, marking the two countries' first joint intervention in 15 years.

Market strategist Ed Yardeni is blaming the unwinding of the Japanese yen carry trade for a global bond market rout and the return of the bond vigilantes. Yardeni dismissed the idea that surging global bond yields are solely the result of inflation fears tied to Middle Eastern conflicts and rising oil prices, noting that U.S. breakeven inflation rates remain surprisingly subdued. Instead, he pointed to the Bank of Japan raising its policy rate and blowing up the highly lucrative yen carry trade, which for years let institutional investors borrow yen at rock-bottom rates and buy higher-yielding assets worldwide, particularly U.S. Treasuries and other government debt. That artificial demand, he said, allowed governments to run massive budget deficits without their borrowing costs spiking, and the vulnerability was laid bare in the summer of 2024 when the BOJ raised rates just as U.S. economic data fueled expectations of Federal Reserve rate cuts, sparking a frantic automated unwinding and a cross-asset global selloff in early August 2024. Earlier on Tuesday, the U.S. 30-year Treasury yield jumped to its highest level since 2002, underscoring how far borrowing costs have climbed at the far end of the curve.

Japan's 2-year bond yield is closing in on the 2% mark, a level it has not reached in more than 30 years. The market is increasingly of the view that Japan's long battle with deflation is over and that the Bank of Japan needs to raise its policy rate to a restrictive level. The 2-year yield has doubled over the past 12 months and is now more than six times its level at the same time in 2024. The 5-year yield hit a record 2.43% on the 28th, and the 2-year, 1-month interest rate swap rate also rose to a record 2.5%. According to Tokyo Tanshi, the probability of a rate hike to a 1.5% policy rate in October, based on swap rates, is 36%, while a December hike is priced in as nearly certain. The timing of the next rate hike may depend on the results of the Bank of Japan's Tankan survey due on the 1st, and Takashi Fujiwara of Resona Asset Management noted that if capital investment in the Tankan proves solid, the view that a rate hike could come as early as October may gain strength.

The Japanese yen strengthened after comments from President Trump expressing concern about the currency's weakness, with Japanese Minister Kiuchi adding that Abenomics is over and super-low interest rates are no longer needed. The yen had been weakening toward levels that prompted reported verbal intervention at the back end of last week, and the remarks gave it a boost. The problem for the Bank of Japan is that even as it finally sounds more aggressive on its hiking cycle, the Fed and the ECB are also tightening, and if the BOJ hikes only once a quarter while others move faster, that will not help the yen or Japan's effort to avoid falling behind the curve. In Asia, Hong Kong stocks fell as markets judged the Trump-Xi summit delivered only the bare minimum, with a trade truce extension and niceties but few concrete deals so far. In bonds, rising real yields and energy price swings are weighing on the market, and with more supply coming, pressure for rates to go higher may continue unless oil prices fall.

Former BOJ Policy Board member Makoto Sakurai, in an interview with Reuters, said he expects the Bank of Japan to continue raising interest rates every three months, with the policy rate reaching 2% by next June. The BOJ decided at its September 17-18 monetary policy meeting to raise the policy rate to 1.25%, the shortest interval of three months for an additional hike since the end of its ultra-loose policy in March 2024. Sakurai called this a major turning point in monetary policy conduct. With heightened tensions in the Middle East, crude oil import prices have risen 70% to 80% compared with before the U.S. and Israeli military strikes on Iran, and he believes that as companies pass on costs, headline CPI is highly likely to exceed 3% from the year-end through the fiscal year-end. He expects the BOJ to raise its inflation forecasts for both fiscal 2026 and fiscal 2027 in its October outlook report, and said that while the timing of the next rate hike will basically be December, a hike in October is also possible if the upward revision is substantial. Regarding this rate hike, U.S. Treasury Secretary Bessent commented on BOJ monetary policy for several consecutive days, creating an unusual situation in which the market almost fully priced in a hike at the September meeting, and Sakurai said it cannot be denied that the BOJ is being helped by U.S. Treasury Secretary Bessent.

The Bank of Japan has gone ahead with its first rate hike in three months. The move is aimed at addressing upside risks to prices, but upward pressure on inflation remains strong, driven by soaring crude oil prices amid concerns over a prolonged Middle East situation and expanding demand related to artificial intelligence. At a press conference on the 18th following the monetary policy meeting, Governor Kazuo Ueda noted that inflationary pressure originating from high crude oil prices and other factors is likely to spread to a broad range of items, and expressed a sense of urgency that the underlying rate of inflation risks rising above the 2 percent price stability target. The domestic corporate goods price index rose 7.6 percent in August from a year earlier, exceeding 7 percent for the third straight month. According to Teikoku Databank, the number of food and beverage items scheduled for price increases in September reached 4,923, more than triple the figure a year earlier, and the annual total is expected to exceed 20,000 items. The government's support for electricity and city gas rates ending with September usage is also expected to push prices higher.

Surat Tanboon, Senior Director of the Monetary Policy Department at the Bank of Thailand, disclosed that the baht is currently moving mainly in line with the US dollar, driven by developments in the global economy, monetary policy actions of major economies, and geopolitical tensions. As for concerns over the interest rate differential between Thailand and the United States, the Bank of Thailand assesses that financial markets have already anticipated and priced in this factor in advance, as reflected in the baht's continued good stability in the recent period. Meanwhile, the Bank of Japan's decision to raise its policy rate to 1.25% is a level that is not significantly far from Thailand's interest rate, and the Bank of Japan's 7-to-2 vote clearly reflects a lack of consensus, prompting financial markets to scale back expectations for Japan's next rate hike. Surat stressed that Thailand's current policy rate is appropriate for the country's context, and that monetary policy going forward will be guided mainly by economic trends. He assessed that the Thai economy is still recovering below its potential and that the recovery is uneven, while inflation is likely to rise on supply-side factors and is expected to gradually decline in 2027. On the external stability of Thailand's financial system, it remains strong with thick buffers, reflected in net international reserves of more than 300 billion US dollars, which exceeds international benchmark standards and covers short-term external debt by 2.8 times. Surat said that given this strong stability, the risk of severe capital outflows is limited in scope. Although some capital flowed out of Thailand during the conflict in the Middle East, it was a very small proportion compared with regional neighbours. The Bank of Thailand is therefore not concerned about the current capital movement situation. In addition, statistics from the start of 2026 to the present show that capital flows remain in a net inflow position into Thai assets, totalling more than 50 billion baht, with continuous accumulated buying in both the stock market and the bond market.

The Nikkei Stock Average extended its gains sharply for a third straight session, closing at 65,018.95 yen. Following the decline in long-term interest rates in the U.S. market, buying flowed into semiconductor-related shares in particular, with Advantest climbing 1,810 yen to 32,050 yen. At its monetary policy meeting, the Bank of Japan decided as expected to raise interest rates to 1.25 percent, but its statement did not strongly hint at the timing of any additional rate hike, easing excessive expectations for further tightening. Kasumigaseki Capital raised its earnings forecast for the fiscal year ending August 2026, lifting its operating profit estimate to 27.6 billion yen from 26.5 billion yen, up 45.8 percent from the previous year. The revision reflects better-than-expected progress in expanding project profits and accelerating property sales in its hotel business.

The Japanese Yen weakened against its major currency peers on Friday after the Bank of Japan's monetary policy announcement. In European trading, the USD/JPY pair rose 1.3% to trade near 158.00. The move followed the Bank of Japan's latest policy outcome, which drove the Yen lower across the board.

The dollar-yen exchange rate has adjusted since the start of September, and on the 7th it fell below 155 yen per dollar for the first time since February of this year. Given that the two rounds of yen-buying intervention this year, Japan's solo intervention during Golden Week and the joint U.S.-Japan intervention toward the end of July, did not manage to push the rate below 155, the view that the market has reached a turning point is likely to gain strength. Behind the upward pressure on the yen is growing expectation that the Bank of Japan will raise interest rates, and after the joint U.S.-Japan intervention at the end of July, pressure from U.S. authorities on the BOJ and the government to accelerate rate hikes has intensified. Around the time of the G20 finance ministers and central bank governors meeting, U.S. Treasury Secretary Scott Bessent met with BOJ Governor Kazuo Ueda and stressed the importance of formulating monetary policy appropriately and communicating its content clearly. Governor Ueda also said at a press conference after the G20 that the BOJ will thoroughly discuss rate hikes at every meeting, including the next one, and in the market, after a September hike, a pace of roughly once every three months is seen as the baseline, while consecutive hikes are also being contemplated depending on the yen's moves. If an acceleration in the BOJ's pace of rate hikes materializes, it would likely bring stability to the bond market while also making the yen more prone to strengthening in response to BOJ rate hikes.

Keizai Doyukai Chairman Akio Yamaguchi said at a press conference on the 18th that the Bank of Japan's decision to raise interest rates at its monetary policy meeting the same day was "an appropriate level for the business community." Yamaguchi noted that bank lending is growing strongly and that "the economy is very strong," and said inflation is also expected to rise. He expressed the view that with the economy firming up overall, the BOJ is raising interest rates to maintain balance.

The Bank of Japan has raised its policy rate to 1.25%. Following the decision, comment sections on Yahoo! News have seen voices pointing to the heavier burden on people who took on more borrowing during the long period of ultra-low interest rates. Some say that even those who switched from variable to fixed rates, as well as current mortgage holders and the generation about to buy homes, will face tougher conditions, and some see more people letting go of their homes as daily life gradually becomes harder. Although the risk of rising rates had already been priced in, rates are climbing at twice the expected pace, and some candidly worry that the margins built up during the low-rate era will disappear.