Recently, I noticed a market signal that is quite worth watching—and one that warrants caution. Japan’s 10-year government bond yield has just jumped to 2.79%, setting a new high in nearly 29 years. The 30-year yield has even surged directly to 4.2%, the highest level since 1999. At the same time, USD/JPY also touched 159 on Monday, and it could continue pushing toward the 160 psychological level.

The logic behind this is actually quite straightforward. Global bond markets have seen a sharp sell-off over the past two days. U.S. 10-year Treasury yields have broken above 4.59%. The main reason is that oil prices have been rising persistently beyond expectations, triggering inflation concerns. The market is now pricing in a 51% probability that the Federal Reserve will raise interest rates again by the end of the year. The issue is that Japan is highly dependent on imported energy; its reliance on Middle Eastern crude oil exceeds 90%. Shipping disruptions in the Strait of Hormuz have directly tied up Japan’s oil imports, and even supplies of chemical raw materials such as naphtha have been cut off. The result is a surge in prices of related products, putting economic pressure on the country.

More importantly, Japanese Prime Minister Sanae Hagiwara is expected to soon announce a supplementary budget to address the impact of the Middle East conflict. Once this news breaks, markets will immediately worry about Japan’s fiscal deficit—thereby pushing up Japanese government bond yields. I think this signal is important because once Japanese domestic investors believe they can earn higher returns at home, funds that were previously parked overseas will start flowing back faster. And since Japan is the largest holder of U.S. Treasuries, if yen carry trades begin to unwind, the U.S. bond market could face another round of selling, creating a vicious cycle.

From the movement of the yen, a weaker yen will further intensify imported inflation pressures, which is a major drag on Japan’s economic recovery. Higher corporate financing costs, suppressed consumer loan demand, and a substantial increase in government debt interest expenditure will all weigh on the economy. Interestingly, it seems the Hagiwara administration also wants to keep maintaining an accommodative monetary policy. This suggests the Japanese government does not want the central bank to raise rates too quickly. But the problem is: if the central bank continues to delay rate hikes, real interest rates will remain low, which will only keep the yen depreciating and further intensify the inflation effect. The market currently broadly expects the Bank of Japan to raise rates in June.

From a technical perspective, USD/JPY has been rising over the past five trading days. It has rebounded to 159.0 and is firmly standing on the long-term upward trend line. In the short term, it may continue to test the 160 level. However, over the medium term, caution is warranted: if the 160 psychological level cannot be effectively broken, the risk of a reversal downward will increase.

As an investor, I think the next steps should focus on several key signals: statements on monetary policy from the Federal Reserve’s new chair, developments from the Bank of Japan, and whether Japan’s bond market will continue to be unstable. If the U.S.-Iran deadlock persists and the Strait of Hormuz is still not open to shipping in June, Japan’s imported inflation pressures will worsen further, and the central bank may be forced to take action. But before that, global bond sell-offs are driving capital into the U.S. dollar for safe-haven demand—meaning that in the short term, USD/JPY still has momentum to rise.