Long-term interest rates rise to 3.115% temporarily; bond selling due to global inflation from high oil prices

Bond selling and yen depreciation—I will briefly organize and explain the relationship between them.

What is bond selling?

It appears to be a structure where not only is the rise in overseas interest rates spreading, but concerns about inflation due to high oil prices are also leading to speculation about additional interest rate hikes by the Bank of Japan, thereby placing separate upward pressure on Japan’s long-term interest rates.

“Bond selling” refers to investors selling bonds, such as government bonds, in the market.

• When bonds are sold, their prices fall.

• When prices fall, yields (interest rates) rise (price and yield have an inverse, seesaw-like relationship).

This Nikkei news means,
“Concerns about inflation are intensifying globally, bonds are being sold, and long-term interest rates have risen (the yield on Japan’s 10-year bond temporarily reached 3.115%).”
Against the backdrop of high oil prices and other factors, bonds are being sold not just in Japan, but globally.

Why is the yen depreciating? (Current situation)

The reason the yen is depreciating even though Japan’s long-term interest rates are rising is mainly due to the following reasons.

1. The interest rate gap between Japan and the U.S. remains large
   Although the Bank of Japan has raised its policy interest rate to 1.25%, speculation about further interest rate hikes in the U.S. has intensified, and U.S. long-term interest rates (10-year bonds) have risen to the 5.2% range. Since dollar assets with higher interest rates are more attractive, the movement to sell yen and buy dollars is dominant.

2. It has become a “bad interest rate rise”
   Because the rise in Japanese interest rates is not coming from “a strong economy,” but rather from

   • global inflation concerns (high oil prices)

   • concerns about fiscal deterioration due to the proactive fiscal policy of the Takaichi administration

   • the view that the Bank of Japan’s interest rate hikes are lagging (behind the curve)
     and other factors, there is a tendency for the yen to be sold at the same time as government bonds are sold.

3. Structural yen-selling pressure

   • Japan’s trade balance is prone to worsening due to high oil prices (a major energy-importing nation)

   • overseas investment by Japanese companies and carry trades (transactions where low-interest yen are borrowed and invested overseas)
     are in the background.

As a result, the rise in Japanese long-term interest rates + further rise in U.S. interest rates + inflation concerns have overlapped, and the dollar-yen exchange rate continues to see yen depreciation in the 158–159 yen range.

More than the figure of over 3%, the point that long-term interest rates are rising simultaneously around the world is important. When inflation concerns reignite due to high oil prices, etc., expectations for interest rate cuts recede and bonds are sold. This is a phase that cannot be explained by Japan’s monetary policy alone. I want to see how the rise in interest rates will spread to mortgages, corporate financing, and stock valuations.

In short, while “bond selling = rising interest rates” is happening, the point of the current yen depreciation is that this rise in interest rates is not strong or reliable enough to become a material for buying the yen.