How will rate increase in Japan affect capital flow in global financial markets?

Tokyo’s bond yields are seeing multi-decade highs as a central bank rate hike looms

Japan is adding a fresh layer of uncertainty to global financial markets by potentially triggering a new bout of turmoil in bond markets and dampening the appetite for risk assets, as Tokyo’s pursuit of increased defence spending stokes concerns about fiscal discipline and sends sovereign bond yields to multi-year highs.

The nation’s 10-year bond yield hit 3.03 per cent this week, a level not seen in three decades, while 30-year bond yields traded at 4.1 per cent, also nearing a 30-year high. The sell-offs, in which bond prices move inversely with yields, came amid speculation that Japan would seek to boost military spending to 3.5 per cent of its gross domestic product from around 2 per cent.