The Bank of Japan's policy shift triggers a chain reaction, with Japanese bond yields hitting new highs and affecting the 10-year U.S. Treasury yields

The Bank of Japan Governor Kazuo Ueda last week clearly signaled a rate hike, and the upcoming interest rate decision on the 18th to 19th of this month is expected to raise the policy rate by 25 basis points to 0.75%. This move is triggering a chain reaction in global bond markets. As rate hike expectations intensify, the 10-year Japanese government bond yield has risen further to 1.95%, hitting a new high since July 2007, with selling pressure in the bond market continuing to accumulate.

Meanwhile, the USD/JPY broke through the 155.0 level but has since fallen back to 154.46 in the short term, hitting a two-week low. The yen’s depreciation, which raises inflation risks, has attracted high attention from the Japanese government. Prime Minister Fumio Kishida’s key officials have stated they will not oppose the Bank of Japan’s rate hike decision.

The 10-year U.S. Treasury yield faces new upward pressure

Market analysis suggests that adjustments to the Bank of Japan’s policy path will directly impact the Japanese bond market and subsequently influence global asset allocation. Long-term Japanese bond yields are prone to rising amid high inflation and fiscal stimulus, likely triggering a large-scale repatriation of Japanese overseas funds, which will have a significant impact on global asset prices.

More concerning is the U.S. debt dilemma. The total sovereign debt issued by the U.S. Treasury has surpassed 30 trillion USD for the first time, more than doubling since 2018. If Japanese investors start selling U.S. Treasuries, it will inevitably push up the 10-year U.S. Treasury yield, creating a resonance effect among Japanese bonds, U.S. stocks, and the dollar. As central bank policies lag behind the curve, the interconnected risks among Japanese stocks, Japanese bonds, U.S. stocks, and the dollar have become increasingly unavoidable.

Technical outlook indicates further downside potential

The daily chart of USD/JPY shows that the price has broken below 155.0, and the AO indicator indicates that downward momentum is building. Based on the key time window reached on November 26, market bearish sentiment remains strong. If the short-term cannot recover above 155.0, the pair may further decline to 152.0 or even 150.0 levels. Only a return above 156.20 can reverse the downward trend.

Be alert to potential risks from inflation data

This week, the market will release the September PCE Price Index, with expectations of an annual rate rising from 2.7% to 2.8%, while core PCE is expected to remain at 2.9%. Although trade tensions are easing and the Federal Reserve is shifting focus to the labor market, if inflation declines and prompts market bets on rate cuts, the narrowing of the Japan-U.S. interest rate differential will further weaken yen carry trades. Investors should remain highly vigilant of potential risks.