Global Market: Japan's benchmark bond yields extend gains as inflation, fiscal concerns weigh

Benchmark Japanese government bond (JGB) yields rose for a third straight session on Monday as investors remained focused on persistent inflationary pressures and concerns over the country's fiscal outlook, according to a Reuters report.

The benchmark 10-year JGB yield climbed 3 basis points to 2.675%, extending its recent upward move. Bond yields move inversely to prices, meaning higher yields reflect selling pressure in government debt.

Investor sentiment was also influenced by reports that Prime Minister Sanae Takaichi's administration is preparing a new growth strategy aimed at mobilising around 370 trillion yen ($2.29 trillion) in combined public and private investment by 2040. The plan, first reported by the Nikkei on Friday, has added to concerns that greater fiscal spending could reinforce inflationary pressures.

According to Reuters, analysts believe that additional fiscal expansion may fuel inflation further, potentially prompting higher interest rates and exacerbating concerns over Japan's already large public debt burden.

Markets are also becoming increasingly confident that the Bank of Japan will continue its policy normalisation following its recent interest rate increase to 1%. Policymakers remain attentive to inflation risks stemming from elevated energy costs and the persistent weakness of the yen, factors that could keep price pressures elevated.

Fresh economic data released on Friday showed that Japan's annual core inflation remained below the Bank of Japan's 2% target for the fourth consecutive month in May. However, Reuters reported that market participants broadly view the latest inflation reading as insufficient to alter the central bank's gradual path toward further monetary tightening.

The combination of expectations for additional rate hikes, inflation concerns and a potentially more expansionary fiscal policy has continued to push Japanese government bond yields higher, with investors closely monitoring upcoming economic data and policy signals from both the government and the Bank of Japan.