Japanese government bond yields fell on Friday, as the yen rose and market bets increased on the Bank of Japan raising interest rates this month, while stocks benefited from lower yields and a strong rise in SoftBank shares, ending four consecutive sessions of losses. The ten-year government bond yield fell by 5.5 basis points to 2.91 percent, while the thirty-year yield fell by 7 basis points to 4.005 percent, in partial reversal of the sharp selling wave that pushed yields over the past days to historic levels.
Katsutoshi Inadomi, chief strategist at Sumitomo Mitsui Trust Asset Management, said that the wave of selling in bonds and the yen had stopped temporarily, noting that expectations of a tightening Bank of Japan, in conjunction with more dovish statements from Federal Reserve officials, helped change the direction of the market.
The yen jumped more than 2 percent against the dollar during overnight trading, supported by expectations of a faster Japanese interest rate hike, in addition to growing speculation that the Japanese Government Pension Investment Fund may increase its allocations to local bonds and yen-denominated assets. The markets are almost fully pricing in the Bank of Japan raising the interest rate to 1.25 percent later in September, and are pricing in another increase by January, according to data from the Tokyo Tanshi Financial Institution.
This means that investors are now treating monetary tightening as a more entrenched factor in pricing Japanese assets.
On the other hand, expectations for raising US interest rates declined, after Federal Reserve Governor Christopher Waller said that he would support keeping interest rates unchanged at the next meeting, if new data confirmed the easing of inflationary pressures. His comments came after signals from New York Fed President John Williams that the rise in long-term bond yields reflects the strength of the economy more than inflation concerns.
The difference in expectations between the two central banks leads to a possible narrowing of the yield difference between the United States and Japan, which provides support for the yen after years in which the widening of this difference was one of the most prominent reasons for the weakness of the Japanese currency. Statements by US Treasury Secretary Scott Besent, who called on Japan to end re-inflation policies, also helped reinforce the belief that Japanese monetary policy is heading toward further tightening. However, Einadomi warned that these factors may not be enough to stop pressure on bonds in the long term, especially if Japanese fiscal policy remains expansionary.
In the stock market, the Nikkei index ended a series of losses that lasted four sessions, rising 1.26 percent to 65,020.94 points, but it ended the week down 2 percent.
As for the broader Topix index, it rose 0.03 percent to 4,103.23 points, recording a weekly loss of 1.05 percent. The bulk of Nikkei's support came from SoftBank Group, which jumped 11.78 percent after the shares of its chip company, Arm Holdings, rose 3.29 percent on Wall Street. Memory chip company Kioxia shares also rose 5.4 percent. The decline in bond yields also helped SoftBank, given the group’s reliance on borrowing financing for a portion of its investments, which makes the lower cost of financing a positive factor for evaluating the stock. But the market gains remained limited compared to the rise of US stocks.
Shotaro Yasuda, a market analyst at Tokai Tokyo Intelligence Laboratory, said that Wall Street's strength was linked to a decline in US rate hike bets, while Japan is moving in the opposite direction with the Bank of Japan preparing to raise interest rates. On the other hand, shares of Japanese trading companies declined after the gains of the previous session, despite Berkshire Hathaway CEO Greg Appel confirming that the group intends to maintain its investments in Japanese trading companies for “many decades.”
Mitsui shares fell 4.45 percent, while Mitsubishi lost 3.1 percent. Friday's movements reveal a new phase in Japanese markets. The rise in the yen and expectations of an interest rate hike no longer necessarily mean simultaneous pressure on all assets. The decline in returns gave stocks, especially growth companies and sectors sensitive to financing, a temporary breathing space. But the broader picture remains tied to the Bank of Japan's path. If interest rate hike expectations come true and the return of Japanese funds from abroad accelerates, the yen may continue to be supported, while bonds and stocks remain vulnerable to broad repricing as the Japanese economy transitions to a tighter monetary environment.
German industrial orders rose more than expected in July, driven by large orders for ships, rail cars and aircraft.
The Federal Statistical Office reported on Friday that industrial orders rose 2.5 percent compared to the previous month, after adjusting for seasonal and calendar factors.
A Reuters poll of analysts' opinions indicated an increase of 0.3 percent.
This increase is almost entirely attributable to the growth of what the Federal Bureau of Statistics classifies under “manufacture of other transport equipment,” which includes aircraft, ships, trains, and military vehicles. New orders in this sector jumped 126.4 percent on a monthly basis.
This investment boom was made possible by a special infrastructure fund worth 500 billion euros, as well as an exemption for defense spending from debt rules approved last year.
Foreign orders fell 2.1 percent in July, while domestic orders rose 9.1 percent. Excluding large orders, new orders fell 1.4 percent compared to June.
“This means that the general trend is still moving sideways at a low level, and therefore the German economy will only recover slightly,” said Marco Wagner, chief economist at Commerzbank.
Despite rising prices as a result of the Iranian conflict and uncertainty resulting from US tariffs, the German economy showed a degree of resilience, growing 0.3 percent in the second quarter, supported by a strong increase in exports.
Many economic institutions raised their growth forecasts this year, supported by improved exports and increased government spending.
The less volatile 3-month comparison showed that new orders between May and July were 2.9% higher than in the previous three months.
Preliminary data was revised to show an increase in new orders in June by 3.7 percent compared to May, compared to an initial increase of 3.1 percent.
“Already high orders in various sectors of the economy are likely to contribute to strengthening the stability of the manufacturing sector,” said Mark Schattenberg, an economist at Deutsche Bank’s research department.
