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Japan is the only major economy where the central bank did not increase interest rates over the last couple of years and as a result Japanese investors were always viewed as a potential source of demand for fixed income product from the US and euro area. There have been times when there was speculation that the Bank of Japan would start to tighten policy.
In the chart below, you can see this happened last October when there was a spike in the 10-year yield, but it subsided quickly as the Bank of Japan did not alter policy. In March the Bank did move. It removed yield curve control and eliminated negative interest rates. The initial response was muted. The 10-year yield did rise but the move was contained.
However, over the last few weeks that yield has started to ‘grind’ upwards and is now at levels we have not seen since 2011. The reason given is that the Japanese authorities may move to support the currency which has dropped to 40-year lows against the US dollar. The currency continues to weaken so the pressure to do something grows which seems to mean higher bond yields in Japan. This is not helpful for bond yields anywhere.
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