Japan's 10-year bond yield hits 1999 high as BOJ hikes rates; tech drives Nikkei rally

Japan's ‍10-year government bond yield jumped to a 26-year peak on Friday after the Bank of Japan raised interest rates to a three-decade ⁠high and signalled more policy tightening.

The Nikkei share average rose, led by artificial intelligence-linked stocks after U.S. peers rallied overnight following blowout forecasts from chipmaker Micron.

The 10-year JGB yield extended earlier gains, rising as much as 5.5 basis points to 2.02%, its highest level since August 1999. The 2% ‌level had long ‌served as a symbolic ceiling during Japan's decades-long battle with deflation.


However, the yen quickly reversed an initial knee-jerk rise and fell as much as 0.4% to 156.19 ‌per U.S. dollar.

In a widely expected move, the BOJ raised short-term interest rates to 0.75% from 0.5% in the first increase since January. The central bank said there was a "high chance" for a virtuous cycle of rises in wages and inflation to be sustained.

"The biggest takeaway for me so far is that the BOJ has moved significantly away from the cautious stance it took previously," said David Chao, global market strategist for Asia Pacific at Invesco.

At the same time, "the long-held belief that rate hikes would give the currency a boost has yet to materialize," he said. "The ‌BOJ's gradual tightening ... ‍coupled with wide interest rate differentials and falling market volatility, could continue to keep the JPY ‍weak."

The Nikkei held onto earlier gains following the BOJ's policy announcement, rising 1.2% ‌to 49,601.00, as of 0536 GMT. The broader Topix climbed 1% to 3,389.30.

Notable advancers in the Nikkei included startup investor SoftBank Group, which surged 6.7%, and data-centre cable maker Fujikura, which jumped 5.5%.

Banks as a group also performed strongly on the Tokyo bourse, adding 1.7%, as rising interest rates boosted the outlook for revenue from lending and investing.

Markets are closely watching BOJ Governor Kazuo Ueda's post-meeting news briefing for insights into the pace and scale of upcoming rate hikes, scheduled for 0630 GMT, coinciding with the close of stock trading.

The two-year JGB yield, which tends to ‍be the most sensitive to monetary policy expectations, climbed 3 bps to 1.095%, the highest since a record peak of 1.1% from June 2007.

The five-year yield added 5 bps to 1.48%, a level last seen ‍in June 2008.

At ⁠the longer end, 20-year yields ⁠gained 3.5 bps to a record 2.97%. The 30-year yield climbed 3.5 bps to 3.41%.

The so-called super-long yields began their current climb in early November as market speculation intensified over the potential size and shape of a stimulus package under the new government of Prime Minister Sanae Takaichi.

Initially, signs that the administration would pressure the BOJ to hold off on rate hikes to support the economy kept shorter-term yields pinned down, but Ueda triggered the biggest bond market selling for four months in early December when he sent a strong signal for an imminent rate hike, and hinted he had Takaichi's consent.

The 10-year yield sat around 1.65% at the end of October.

Takaichi has billed her fiscal policy as "responsible" and "sustainable", but investors worry about a wave of new debt issuance.