Japanese Credit Default Swaps Rise on Inflation and Yield Concerns

Japanese Credit Default Swaps Rise on Inflation and Yield Concerns

The cost of hedging Japanese government debt against default rose to a six-week high, as markets reacted to stronger-than-expected inflation data and rising bond yields. According to S&P Global Market Intelligence, the 5-year credit default swap (CDS) for Japanese sovereign debt climbed by 1 basis point to 23 basis points.

The increase comes after inflation data released overnight exceeded forecasts, intensifying speculation that the Bank of Japan may consider further tightening of its monetary policy. The stronger inflation reading has raised fears that yields on long-term Japanese government bonds (JGBs)—including the 30-year and 40-year maturities, which hit record highs this week—could continue to rise.

“Overnight Japanese inflation data had sparked concerns of another leap higher in bond yields following a record high in the 30-year and 40-year yield this week,” said Joshua Mahony, Chief Market Analyst at Rostro.

Investors are becoming increasingly cautious, with rising inflation and rate hike expectations challenging Japan’s traditionally low-yield environment. Even small increases in borrowing costs could significantly impact the country’s heavily indebted fiscal position.

As bond markets grow more volatile, analysts will be closely monitoring the Bank of Japan’s next policy steps, as well as future inflation data, for indications of a potential shift in Japan’s ultra-loose monetary stance.