Japanese government bond yields experienced a little increase on Friday in the final hours of a turbulent year that was reminiscent of the global financial crisis. Overall, the year has been unpredictable, with only slight advances over the beginning of the year.

Japanese bond yield

By 0613 GMT, the yield on the 10-year Japanese government bond increased by 3.5 basis points (bps) to 0.62 per cent, reflecting the recovery in US Treasury rates overnight from a five-month low. This rebound coincided with mounting rumours that the Federal Reserve may decrease interest rates early in the future year.

Japan's benchmark yield saw sharp fluctuations all year long, falling as low as 0.24 per cent in March and then surging to a ten-year high of 0.97 per cent in November. This astounding range of 73 basis points is the largest variation since the 74 basis point swing that was noted in 2008.

The rate outlook

However, even with this volatility, the Japanese 10-year yield is expected to end the year at just 21 basis points—much less than the 34 basis points that it increased by last year. However, this would represent the fourth yearly increase in a row, indicating Japan's steady recovery from deflation and a potential move away from monetary support.

Due to the central bank's consistently dovish tone, expectations for an immediate halt to negative interest rates during the January policy meeting have decreased; however, analysts and investors are monitoring a potential policy shift by April. 

Chief Japan macro analyst Naka Matsuzawa of Nomura Securities underlined that concerns about the U.S. economy and monetary policy conduct, rather than Japan's wage situation and economic conditions, are the primary reasons behind the BOJ's reluctance to provide a timeline for raising negative rates. This prudence may have been brought on by the sudden dovish turn at the December FOMC, which caused market players to hastily factor in rate reductions that went beyond the stated message.

(With Reuters inputs)