Prospect Of Japan Rate Rise Rattles Investors

BY SAM GOLDFARB

U.S. markets are facing a threat from across the Pacific.

Yields on government debt, which rise when the prices of those bonds fall, climbed around the world on Monday after the Bank of Japan governor hinted at a potential interest- rate increase later this month—surprising investors who had thought he might hold off under possible pressure from the country’s new prime minister.

The comments from BOJ Gov. Kazuo Ueda pushed the yield on Japan’s 10-year government bond to 1.879%—its highest closing level since June 2008, according to Dow Jones Market Data. The yield on the 10-year U.S. Treasury note also climbed, settling at 4.095%, from just below 4% in the middle of last week.

Some on Wall Street worry that rising bond yields in Japan will draw cash away from U.S. investments and spark a climb in Treasury yields, which play a key role in determining borrowing costs for consumers and businesses.

The world’s third-largest economy is the U.S. government’s largest foreign creditor, according to Treasury Department data, holding Treasurys valued at about $1.2 trillion as of September. Private Japanese investors poured hundreds of billions of dollars into U.S. and other foreign bonds in recent years, seeking better returns than they could find at home.

For most of this year, that dynamic hasn’t played out. Japanese bond yields have climbed, as investors there prepare for higher rates. Yields on Treasurys, meanwhile, have fallen, as the Federal Reserve moves in the opposite direction. Still, analysts warn that there could be limits to that divergence.

“You’d seen a lot of comfort with the idea that U.S. yields

are just moving lower in this predetermined path,” said Zach Griffiths, head of investment grade and macro strategy at the research firm CreditSights. “Today is a reminder that there are a lot of factors that could challenge that.”

Investors and economists pay close attention to U.S. Treasury yields because they play a critical role in determining borrowing costs across the economy, along with the prices of a range of financial assets.

Treasury yields have declined this year thanks in large part to a cooling labor market, which has pushed the Fed to start cutting interest rates again. That in turn has helped lower mortgage rates and boost stocks, which tend to benefit from lower yields, because investors can no longer get as much risk-free return from simply holding Treasurys to maturity.

U.S. stocks fell Monday. The S&P 500 dropped 0.5%, the Dow Jones Industrial Average fell 0.9%, or around 427 points, and the Nasdaq composite gave up 0.4%. This year, though, the S&P 500 is up 16%, even managing to eke out a gain last month despite growing concerns about lofty tech-stock valuations.

Some investors believe that stocks are now in an even better position after their early November losses, arguing that indexes had been due for a pullback after months of steady gains.

“It’s always healthy to get some air let out of the balloon,” said Nancy Tengler, chief investment officer at Laffer Tengler Investments.

In recent months, many investors have grown hopeful that the U.S. economy is in almost perfect position for stocks and bonds to keep rallying: soft enough to support further interest-rate cuts but not so weak as to generate recession fears.

The Fed has cut rates at each of its past two meetings.

PRESS

Just a few weeks ago, investors were doubtful that it would cut again at its Dec. 9-10 meeting, but that changed after key officials signaled that they would support another move.

Yields on Treasurys largely reflect investors’ expectations for what short-term rates set by the Fed will average over the life of a bond. With those rates already below 4%, many have argued that it was only a matter of a time before yields on 10-year Treasurys also dropped be--low that threshold.

In Japan, the central bank has been slowly moving toward tighter monetary policies in the face of sticky inflation. The BOJ first raised rates out of negative territory in early 2024, and has lifted rates twice since then—the last time in January.

Japan’s finance ministry also recently said it plans to boost government-bond issuance to fund an economicstimulus package, putting further upward pressure on bond yields.

Some analysts have questioned whether the Bank of Japan would raise rates now, at a time when new Prime Minister Sanae Takaichi is trying to boost the economy. But many were revising their views after Gov. Ueda said that the BOJ would thoroughly discuss the possibility of a rate increase at its next meeting.

Ueda said that the country’s economic outlook had improved after Tokyo’s recent trade agreement with the Trump administration.

“Uncertainties surrounding U.S. tariff policy and the U.S. economy, which we had been particularly monitoring, have significantly declined compared to a few months ago,” he said at a news conference in Nagoya on Monday.