• Twenty-year yield rises to 1.77% after cut in operation size
  • Wide yield gap between Japan and US has fueled yen weakness

Japanese sovereign bond yields are surging to the highest levels in more than a decade amid signs the central bank is ready to reduce debt purchases to ease pressure on the ailing yen.

The yield on 20-year sovereign debt rose 3 basis points to 1.765% after touching 1.77%, the most since 2013, while that on 30-year bonds reached its highest since at least 2011. The benchmark 10-year Japanese government bond yield increased 2.5 basis points to 0.965%, just shy of the peak level in more than a decade.

The Bank of Japan on Monday offered to buy a smaller amount of bonds, raising speculation it will accelerate the pace of monetary policy normalization to support the currency. Its next bond-purchase operation is on Friday. An auction of five-year notes also saw tepid demand, adding to signs of upward pressure on yields.

“Investors are reluctant to buy bonds on concerns the BOJ will cut the purchase amount again on Friday,” said Tadashi Matsukawa, head of fixed income at PineBridge Investments Japan Co. Investors are also cautious ahead of US inflation data on Wednesday, he said.

Japanese bond yields have been pushed upward by rising US yields and lingering speculation the central bank will deliver an additional interest-rate hike sooner rather than later. The wide yield gap between Japan and the rest of the world, especially the US, has been fueling the yen’s depreciation.

The yen weakened slightly to 156.40 against the dollar, on track to fall for a third straight day.

While higher bond yields may support the yen by increasing their appeal for Japanese investors, there’s skepticism in the currency market about whether the BOJ will let yields climb too sharply.

“The view in the foreign-exchange market that the BOJ will emphasize stability in interest rates is very ingrained,” said Shusuke Yamada, head of Japan currency and rates strategy at BofA Securities Japan Co. “Unless the BOJ makes a series of further reductions or issues a clear message of quantitative tightening, the effect on the yen will start to be lost.”

Finance minister Shunichi Suzuki said at a press conference on Tuesday that the government will closely monitor the exchange rate situation and take all possible measures as needed.

Japanese government bond yields will probably stabilize around current levels while those in most developed markets decline, providing support for the yen, according to Capital Economics.

The 10-year Treasury yield will probably fall to 4% at the end of this year, reducing the difference with its counterpart in Japan to about 300 basis points, senior markets economist Hubert de Barochez wrote in a note dated Monday. This should boost the yen to 145 per dollar at year-end, he said.

Written by:  and  — With assistance from Daisuke Sakai and Hidenori Yamanaka @Bloomberg

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