JGB selloff deepens as BOJ's Takata pushes for faster rate hikes

Japanese government bonds extended their selloff on Wednesday, pushing yields to multi-decade highs after a hawkish central bank board member called for a faster pace of interest rate increases.

The 5-year bond yield jumped 4 basis points to a record 2.295%, while the 2-year yield rose a similar margin to 1.84% — its highest level since April 1995. The moves come as investors brace for tighter monetary policy and weigh the impact of heavy government spending.

Bank of Japan board member Hajime Takata said the central bank must conduct rate hikes nimbly, after gauging domestic financial conditions and examining overseas developments. His comments were seen as a clear signal that the BOJ will raise its policy rate this month and continue tightening at an unconventional pace, according to market strategists.

Takata was the sole dissenter to the BOJ's July decision to hold short-term rates at 1%, having argued for an immediate hike to 1.25% to counter inflationary risks from external demand shocks.

The selloff is part of a broader global trend, with yields rising on investor anxiety over inflation and elevated government debt levels. Japan's 10-year yield climbed to 3.01% on Wednesday, after touching 3% for the first time since 1996 in the previous session.

Adding to the pressure, Prime Minister Sanae Takaichi's aggressive spending plans may lead to increased issuance of two- and five-year bonds. Budget requests for fiscal 2027 are projected to reach 140 trillion yen ($874 billion), far exceeding last year's record 122.3 trillion yen.

Strategists expect the selloff to continue, with the 10-year yield potentially rising to 3.2% by October — a level that would double since Takaichi took office last year. The 30-year yield also rose 1.5 basis points to 4.195%, near its May record high of 4.2%, ahead of an auction for that maturity.