The Implications of Rising Government Bond Yields and the Yen Exchange Rate

■ Except for Japan, the yield curves of government bonds in major countries are showing "bear flattening," mainly due to increased market expectations of interest rate hikes.  

■ Japan, on the other hand, is experiencing "bear steepening," as market vigilance regarding increased fiscal spending is growing, potentially triggering further expectations of yen depreciation. 
 
Globally, government bond yields are rising. US Treasury yields have broken through key levels widely watched by the market—4% for 2-year bonds, 4.5% for 10-year bonds, and 5% for 30-year bonds. Regarding Japanese government bond yields, 2-year yields have reached their highest level since May 1995, 10-year yields have reached their highest level since May 1997, and 20-year yields have reached a new high since August 1996. Furthermore, among other major developed countries, 30-year government bond yields are also attracting attention; for example, German yields have reached their highest level since July 2011, and British yields have reached their highest level since March 1998. The trend of ultra-long-term government bond yields is increasingly being valued by the market. 

 
Looking at the changes in the yield curve, in major developed countries (excluding Japan), it can be understood that market expectations for interest rate hikes are outweighing concerns about increased fiscal spending due to inflationary pressures from factors such as rising energy prices. Comparing data from the end of last year and recent (May 19th closing) for the US, Germany, and the UK, the spread between 10-year and 30-year Treasury yields narrowed from 0.67% to 0.51% in the US, 0.62% to 0.50% in Germany, and 0.72% to 0.66% in the UK. Similarly, the spread between 2-year and 30-year Treasury yields also decreased from 1.37% to 1.06% in the US, 1.35% to 0.94% in Germany, and 1.47% to 1.28% in the UK. Even in the UK, where concerns about fiscal expansion due to potential regime change are strong, it can be confirmed that while Treasury yields are rising, the yield curve is flattening (bear market flattening) is underway. 
 
In contrast, Japan presents a different picture from the US, UK, and Germany. The spread between the yields on 10-year and 30-year Japanese government bonds had previously been below 1.33% at the end of last year, but widened to 1.37% recently after reports surfaced on May 14th that the Takaichi government was considering a supplementary budget. Simultaneously, the spread between the yields on 2-year and 30-year government bonds widened from 2.22% to 2.72%. This means that while overall government bond yields are rising, Japan's yield curve is steepening (bear market steepening), and the risk premium for long-term and ultra-long-term Japanese government bonds is widening compared to the US, UK, and Germany. 

 
In summary, considering the changes in the yield curves of major developed countries since the end of last year, the Japanese market is more wary of increased fiscal spending, which could be a factor driving the yen's depreciation. In particular, with the rise in ultra-long-term government bond yields, market expectations for yen depreciation may further strengthen as details of the supplementary budget plan and its fiscal sources are gradually disclosed. The future policy direction of the Takaichi government will be closely watched, including adjustments to deficit bond issuance (issuance size, maturity, etc.), whether to implement actual foreign exchange intervention to curb the depreciation of the yen, and policy coordination with the Bank of Japan.