Japan's 10-year bond yield hits 3%, highest since 1996, as Bessent pushes for stronger yen

Japan's benchmark 10-year government bond yield touched 3% on Tuesday for the first time since 1996, while the yen traded above 160 per dollar for a third straight session. The moves come as US Treasury Secretary Scott Bessent says he expects Tokyo and the Bank of Japan to act to support the yen.

Yen breaches 160

The yen was last trading at 160.1 per dollar, breaching the level some traders see as increasing the likelihood of currency intervention. Japan's benchmark borrowing costs rose 6 basis points to nudge above 3%. Global bonds were also under pressure, with the resumption of US-Iran military hostilities over the weekend reigniting inflationary fears. Bond yields move inversely to prices.

Bessent told CNBC in a Monday interview: "I have information that the market doesn't have. And it's my belief that the Japanese government and that the BOJ will do the things that will lead to a stronger yen."

A US official told broadcaster NHK that Bessent emphasised the need for Japan to communicate its path toward fiscal sustainability and "also rate hikes" in separate meetings with Japanese Finance Minister Satsuki Katayama and Bank of Japan Governor Kazuo Ueda.

Intervention watch

The US and Japan conducted a rare joint intervention to support the yen in late July, but the currency has since surrendered much of its gains. Katayama told reporters that the US and Japan had agreed to continue their coordinated effort to achieve "orderly" moves in the yen to ensure global market stability, and remained ready to act in response to "disorderly" market moves, according to Reuters.

A years-long slide in the yen is increasingly concerning to Tokyo because a weaker currency raises import costs and adds pressure to consumer prices. That worries Washington, analysts say, because Japan is the largest foreign holder of US government debt. Financing an intervention could involve a major sale of Treasurys at a time when long-term borrowing costs are already under pressure.

Rate hike expectations

Japan's higher borrowing costs reflect a rising chance of a Bank of Japan rate hike in September, and the market perhaps adjusting the terminal rate from 1.5% to 1.75% or higher, Takuji Okubo, managing director at Japan Macro Advisors, told CNBC. The terminal rate is the highest interest rate a central bank is expected to move policy to in the current cycle before it pauses or starts cutting. Japan's benchmark rate is currently 1%.

Okubo said a 3% 10-year borrowing cost "is high in historical perspective, but it just means another step for Japan in leaving deflation in the past and joining the rest of the world where 2% inflation is an achievable normal."

For Nigerian businesses watching the dollar, a stronger yen could weaken the dollar index and add another layer of volatility for emerging market currencies like the naira. Any major sale of US Treasurys by Japan could also push global borrowing costs higher, affecting dollar liquidity and portfolio flows into Nigeria.