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Two pieces of data collided in Tokyo within hours of each other.
Bond investors pushed the 10-year Japanese government bond yield to a three-decade high before the government reported that growth had come in at barely half the pace economists had forecast, a pairing that says a great deal about what is really driving Japan’s markets right now.
The economy expanded at an annualised rate of 1.1% in the second quarter, Cabinet Office data showed, well below the 2.0% forecast and down from a downwardly revised 1.9% pace in the first quarter.
Quarter on quarter, GDP rose just 0.3% against a forecast of 0.5%, marking a third consecutive expansion. Private consumption was flat, and capital expenditure fell 1.2%, while net exports, helped by the weak yen, added 0.5 percentage points to growth.
The 10-year JGB yield touched 2.93% earlier in the day, its highest level since September 1996, before easing slightly once the GDP figures landed.
The gap between weak growth and rising bond yields helps explain what is moving Japanese bonds now: not growth, but inflation and the currency.
The GDP deflator rose 2.6% year on year, and traders are increasingly betting that the Bank of Japan will raise its policy rate, currently at 1% and already a three-decade high, as soon as September to contain inflation and support the yen.
Tokyo and Washington spent billions defending the yen
The yen slid to 163.73 per US dollar in late July, its weakest level in roughly four decades, prompting Japan and the US to carry 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 currently a wide gap between Japanese and US interest rates, with the Federal Reserve’s benchmark rate still at 3.50% to 3.75%. The Bank of Japan’s September meeting is being watched as the next test of whether the currency’s recovery can hold.
Japan’s bond market matters well beyond Tokyo because of the yen carry trade, in which 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, as it 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.