Yen: JGB Spillover Effect Supports USD/JPY Strength – OCBC

OCBC analysts Selena Ling and Huang Guoqiang said the continued rise in long-term Japanese government bond (JGB) yields is increasingly influencing global yield curves through spillover effects, becoming a key factor underpinning the yen's strength against the U.S. dollar. USD/JPY is currently trading around 159.18.

**Transmission Logic of Rising JGB Yields**

The rise in long-term JGB yields has narrowed the expected interest rate differential between Japan and the U.S., reducing the yen's appeal as a funding currency. Market data shows the 10-year JGB yield had previously risen to around the 2.79%-2.80% range, with the 30-year yield near 3.97%. Although absolute levels remain below U.S. Treasuries of comparable maturities, for debt-burdened Japan, each percentage point rise in yields means a significant increase in fiscal interest payments. OCBC believes this shift is providing support for the yen through linkages across global yield curves.

**Conflicting Forces Facing the Yen**

The yen is currently caught in a web of bullish and bearish forces. On one hand, rising JGB yields and market expectations of Bank of Japan policy normalization constitute structural factors supporting the yen. On the other hand, Japan's massive debt load—with total debt exceeding twice the size of its economy—and potential further government spending continue to weigh on the yen. According to earlier reports from The New York Times Chinese edition, Japanese Finance Minister Katsunobu Kato has stated that further measures to boost the yen would not be ruled out if necessary, while emphasizing close communication with the U.S. Treasury Department.

**Institutional Views and Market Context**

The OCBC analysts' views come against a backdrop of sharp yen volatility. Previously, driven by heightened Middle East tensions and rising international oil prices, the yen had weakened to around 163.96 against the dollar, marking multi-year lows. With long-term JGB yields now climbing, the market is beginning to reassess the relative attractiveness of yen-denominated assets. The analysts noted that the spillover effect from the JGB market has become a variable that cannot be ignored in observing yen movements, with its impact extending beyond Japan's borders and spreading across global yield curves.