Japan’s 10-year bond yield hits 3% as AI selloff rattles Nikkei

Government bond yields rose across Asian markets on Tuesday, with Japan’s benchmark 10-year yield hitting the 3% mark for the first time in 30 years amid inflation worries and mounting fiscal strains.

This surge in borrowing costs continues to weigh heavily on Japanese equities, particularly technology and artificial intelligence-related stocks. It follows a volatile Monday session, in which the Nikkei share average closed virtually flat amid a mix of tech-sector anxiety and macroeconomic headwinds.

These equity gains remain capped by geopolitical risks in the Middle East and rising domestic inflation fears, especially as market consensus builds for an imminent Bank of Japan interest rate hike this September.

Analysts predict a high probability of a Bank of Japan rate hike

Bond yields moved higher in tandem with those of other Asian and global economies on Tuesday morning. For instance, South Korea’s 10-year government yield rose 0.06 percentage points, exceeding 4.37%. Meanwhile, Australia’s benchmark yield scaled a five-week high above 5.1%, alongside slight upward ticks in New Zealand and Singaporean 10-year debt. The 10-year U.S. Treasury yield had also hit a peak of 4.76% overnight.

Some of these upticks are closely tied to escalating conflicts in the Middle East, which have lifted Brent crude futures by 0.7% to nearly $91 per barrel, intensifying global commodity supply fears. Nonetheless, the current momentum is boosting expectations for more central bank rate hikes.

According to CME FedWatch metrics, markets currently price in a better-than-60% chance that the U.S. Federal Reserve will raise interest rates at its September meeting.

Beyond global macro factors, Japanese market sentiment is being adversely affected by structural fiscal factors and weakening supply-and-demand dynamics in the domestic bond market. The chances of an increase in the bank rate in the near future stand at 93%, based on Totan Research and Totan ICAP data.

Nonetheless, Japan will be selling its 10-year government bonds on Tuesday afternoon. Michael Wan, a senior currency analyst at MUFG Bank, Singapore, noted that it would reveal investors’ stance on higher yields in developed market bonds around the world

Some of Japan’s AI-related shares declined

Most AI-related stocks, which have a substantial influence on Japan’s major Nikkei index, fell on Monday. Cable maker Fujikura fell 3.5%, while conglomerate SoftBank Group fell 3.3%. However, semiconductor equipment makers rose, with Tokyo Electron rising 2.1%.

The Topix index of Japan also ended marginally higher, rising 0.1%, amid new costs weighing on corporate profit margins in the technology industry. Chipmaker Nvidia just told its best customers they should be ready for an increase of more than 15% in AI servers due to rising memory costs.

The weak performance of AI-oriented Japanese stocks comes as investors wonder whether the extraordinary rally in technology stocks can continue at the same pace. Semiconductor and AI companies have enjoyed huge demand for data centers, advanced chips, and computing solutions, but rising financing costs are putting more pressure on a more challenging environment.

Investors will now ask whether corporate earnings can still justify elevated valuations as bond yields rise. If AI spending cuts or pressure on profit margins play out, such companies that saw big gains during the AI boom could see their shares fall, particularly those with the greatest gains in earnings.

At the same time, Japan’s semiconductor sector remains strategically important, supported by government efforts to boost domestic chip production and attract investment in advanced manufacturing. That might provide some longer-term support even if higher interest rates create short-term volatility.