CPI vs. GDP: Fed and BoJ Face the Same Dilemma as Long-Japan Bond Yields Plummet!

TradingKey - Although the U.S. and Japan are at different stages of their monetary policy cycles, both the Federal Reserve and the Bank of Japan (BoJ) now face the same challenge: rising inflation paired with slowing economic growth.

As U.S. Treasuries once again fell to the so-called “Trump’s Bottom Line,” Japan’s long-term bond yields also edged toward historic highs.

Against the backdrop of potential further rate hikes by the BoJ, Japanese bond yields have been rising since 2025. On May 15, the yield on Japan’s 30-year government bond hit a high of 2.994%, approaching its all-time peak of 3.03%. A day later, on May 16, after Japan released weaker-than-expected GDP data, the yield on the U.S. 30-year Treasury dipped below 2.90%.

Chart of Japan's 30-Year Government Bond Yield, Source: Investing.com

In terms of long-term bonds, Japan’s recent surge in bond yields has far outpaced those seen in major markets like the U.S., U.K., and Germany.

Analysts at Sumitomo Mitsui noted that while they previously believed the 3% level for Japan’s 30-year bond yield was a target, it now appears to be merely a threshold to surpass.

Mizuho analysts pointed out that the steepening of Japan’s yield curve reflects changes in the country’s monetary and fiscal landscape. 

Meanwhile, Bloomberg analysts warned that the cost of servicing Japan’s debt is becoming increasingly expensive — and could soon draw negative scrutiny from credit rating agencies.

The BoJ’s Dilemma: Fight Inflation or Rescue Growth?

Similar to Japan’s bond market selloff, the rise in U.S. bond yields this week — with the 10-year Treasury yield breaking 4.5% and the 30-year yield nearing 5% — was driven by fading expectations of Fed rate cuts due to easing U.S.-China trade tensions.

While the causes behind the bond selloffs differ, the core dilemma facing both central banks remains the same: inflation up, economy down.

After ending its negative interest rate policy in March 2024 — marking the first rate hike in 17 years — the BoJ began tightening monetary policy amid signs of an inflation-wage virtuous cycle and optimistic economic recovery prospects. 

However, shifting domestic and global economic conditions have placed the BoJ in a difficult position: should it continue raising rates to contain inflation, or maintain low interest rates to support economic growth?

Some observers argue that the sharp rise in Japan’s bond yields sends a clear message to the market: the BoJ should not underestimate household inflation expectations — which have already risen and may continue to climb.

According to Bank of Japan surveys, as many as 86.7% of Japanese households expect prices to rise over the next year, the highest proportion since June last year.

On the economic front, Japan reported on May 16 that Japan’s GDP contracted by 0.2% quarter-on-quarter (QoQ) and 0.7% year-on-year (YoY) in Q1 2025 — marking the first negative growth since Q1 2024. Exports declined by 0.6%, the first contraction in four quarters.

The Nikkei noted that U.S. tariff policies have heightened uncertainty around external demand, while rising domestic prices have yet to translate into strong consumer spending.