Japan's 10-year bond yield hits 30-year high as growth slows sharply

Japan's 10-year government bond yield touched a three-decade high on the same day the government reported economic growth at barely half the pace economists had forecast. The yield rose to 2.93% earlier in the day, its highest level since September 1996, before easing slightly when the GDP figures were released.

The Cabinet Office said the economy expanded at an annualised rate of 1.1% in the second quarter, well below the 2.0% forecast and down from a downwardly revised 1.9% in the first quarter. Quarter on quarter, GDP rose just 0.3% against a forecast of 0.5%, marking a third consecutive expansion.

Weak domestic demand, export boost

Private consumption was flat, and capital expenditure fell 1.2%. Net exports, helped by the weak yen, added 0.5 percentage points to growth. The GDP deflator rose 2.6% year on year, showing inflation remains stuck above the Bank of Japan's comfort zone.

Traders increasingly expect the Bank of Japan to raise its policy rate, currently at 1% and already a three-decade high, as soon as September. The central bank is trying to contain inflation and support the yen, which slid to 163.73 per US dollar in late July, its weakest level in roughly four decades.

Joint intervention and the carry trade

Japan and the US carried out their first joint currency intervention since 2011. Japan deployed an estimated $85 billion (€73.3bn) in the first two days alone, while the US intervention was much smaller, according to Goldman Sachs. The operation pushed the yen back to around 159 per US dollar.

There is still a wide gap between Japanese and US interest rates, with the Federal Reserve's benchmark rate at 3.50% to 3.75%. The Bank of Japan's September meeting is now being watched as the next test of whether the yen's recovery can hold.

Japan's bond market matters well beyond Tokyo because of the yen carry trade. Investors borrow cheaply in yen to fund purchases of higher-yielding assets abroad, from US Treasuries to emerging-market debt. Rising Japanese yields erode that trade's profitability and can force rapid unwinding.

That happened in August 2024, when a Bank of Japan rate rise combined with weak US jobs data sent the Nikkei down more than 12% in a single session and knocked roughly 3% off the S&P 500. With JGB yields at three-decade highs and further tightening still expected, analysts say the conditions for a similar shock have not disappeared.

What this means for Nigeria

A sudden unwinding of the yen carry trade could hit global risk appetite, pushing investors out of emerging-market assets like Nigerian bonds and equities. That would put pressure on the naira and raise borrowing costs for Nigerian businesses, just as the country is trying to attract foreign capital.