Japanese stocks and bond yields rise amid European pressure on Britain over tariffs

Japanese stocks continued their gains, on Friday, supported by the rise of artificial intelligence and chip companies and investors’ desire to buy stocks before dividends are due, at a time when government bond yields continued to rise to historic levels with increasing expectations of the Bank of Japan raising interest rates again.

The Nikkei index rose by 1.30 percent to close at 66,364.20 points, recording the fifth consecutive session of gains, so its weekly tally rose by slightly more than 2 percent despite the short trading week due to the holidays. The broader Topix index also rose 1.31 percent to 4,128.59 points.

Daisuke Hashizumi, chief strategist at Daiwa Securities, said that investors bought shares to obtain the right to dividends before the deadline on Monday, but demand for shares of chip companies was also one of the most prominent factors supporting the market.

Banks led the gains among the 33 sectors on the Tokyo Stock Exchange, with the sector index rising 4.08 percent, benefiting from the attractiveness of dividends and high returns. Mitsubishi UFJ Financial Group shares jumped 3.95 percent, and Sumitomo Mitsui Financial Group rose 3.59 percent.

In technology, “Tokyo Electron” rose 4.82 percent and “Advantest” rose 2.84 percent, to constitute the largest source of support for “Nikkei.” Epiden shares, which manufacture components for central processing units, also rose 4.2 percent after jumping 14.57 percent in the previous session.

On the other hand, SoftBank Group shares fell 3.18 percent after Oracle shares fell on Wall Street, following a report about potential delays associated with securing electricity for a huge data center in New Mexico. SoftBank, along with Oracle and OpenAI, participates in the “Stargate” artificial intelligence infrastructure project.

The rise was characterized by relative breadth, as 171 Nikkei component stocks rose, compared to a decline of 51 stocks and the stability of three stocks.

In parallel, the wave of selling government bonds continued. The ten-year bond yield rose 4 basis points to 3.115 percent, a level not recorded since August 1996, while the five-year bond yield rose to a record level of 2.405 percent.

The two-year bond yield, the most sensitive to monetary policy movements, reached 1.92 percent, the highest since April 1995, while the 40-year bond yield rose to 4.255 percent.

These moves come after the Bank of Japan last week raised the interest rate to 1.25 percent, the highest level in 31 years. Barclays Securities Japan analysts said that the weakness of the yen, continued expectations of interest hikes, escalating concerns about financial discipline, and rising external yields may continue to push bond yields higher.

In a remarkable shift within the debt market, data from the Japanese Securities Dealers Association showed that local investors bought government bonds with coupons worth 21.7 trillion yen, about $137 billion, between April and August, equivalent to 89 percent of total purchases for the entire fiscal year 2025.

Domestic demand was focused on medium-term bonds, purchases of which reached 12.7 trillion yen in five months, already exceeding 9.1 trillion yen during the entire previous fiscal year.

In contrast, purchases by foreign investors fell sharply to 2.8 trillion yen, compared to 32.8 trillion yen in fiscal year 2025. Foreigners turned into net sellers of medium-term bonds worth 1.9 trillion yen.

Friday's moves reveal a broad realignment within Japanese markets: AI and dividends are supporting stocks, while higher yields make bonds more attractive to the domestic investor. At the same time, rising borrowing costs, a weak yen, and expectations of further monetary tightening remain major factors determining the direction of Japanese assets over the coming period.

Brussels has told British Prime Minister Andy Burnham that the United Kingdom needs to lift tariffs on Chinese cars and move closer to the European Union's trade policy, in order to avoid its main exports facing potential obstacles under the "Made in Europe" rules that the bloc is developing, according to a report by the Financial Times.

According to the report, which was based on two sources familiar with the discussions, the European Union informed London, in response to its demands for similar treatment for European products, that the best solution lies in Britain joining the European Customs Union, according to Reuters.

The newspaper quoted a European official as saying, “The customs union would solve most of the problems associated with the ‘Made in Europe’ rules, and it would also address the issue of differences in customs duties, which raises concerns about the possibility of Chinese companies circumventing European duties by directing their exports through the United Kingdom.”

This week, Burnham confirmed his intention to demand that Britain be considered a “reliable partner” within the proposed rules of the “Made in the European Union” policy, warning that excluding the United Kingdom could harm the British automobile industry.

The new European policy aims to reduce dependence on Chinese components by giving priority to goods manufactured within Europe, which raises concerns for the British automotive sector, which supplies European supply chains with components and sells its cars in various EU markets.

In a related context, European Commission President Ursula von der Leyen stressed, during her “State of the Union” speech this month, that the European Union will use all available tools to reduce the trade deficit, which she described as “unsustainable” with China.

Government bond yields in the euro zone are heading towards recording a seventh consecutive weekly rise, in light of rising energy prices and increasing hawkish indicators from central banks, which has strengthened market expectations regarding interest rates.

Oil prices fell slightly on Friday, but crude prices are heading to end the week with an increase of 1.3 percent, according to Reuters.

Benchmark German bond yields (the Bund) fell by 3.5 basis points, after recording 3.6114 percent on Thursday, their highest level since June 2009, but they are heading to record a weekly rise of 5.5 basis points.

The two-year German bond yield, which is most sensitive to interest rate expectations, also fell by two basis points to 3.27 percent, after touching 3.3269 percent the previous day, its highest level since September 2023.

French and Italian bonds witnessed different paths this week, as French debt remained under pressure, while Italian government bonds witnessed a slight recovery.

Investors intensified their bets on raising interest rates, which led to an increase in borrowing costs and raised questions about the ability of the most indebted economies in the euro zone to bear their debt burdens.

Money market pricing indicates expectations that the European Central Bank's deposit interest rate will reach 2.86 percent by December, which means an expected rate hike of a quarter of a percentage point, with a probability of just under 50 percent for a second hike.

Markets also expect the interest rate to reach 3.46 percent by late 2027, compared to the current level of 2.50 percent.

The spread between French and German government bond yields, a market measure of the risk premium that investors require to hold French debt, is on track to record a fourth consecutive weekly rise. The spread widened by 4 basis points after touching 114.06 basis points, its highest level since June 2012, compared to 106.50 points on Friday.

On the other hand, the Italian difference tended to shrink slightly on a weekly basis, after it reached 99.90 points, which is its widest range since March 2016, before recording in the latest reading 91.50 points.