Traders Underpricing Risk of Higher Japan Yields, Vanguard Says

As traders pile into wagers for an interest-rate hike from the Bank of Japan this month, they’re still missing the risk that Japanese interest rates will need to march even higher to quell inflation, according to Vanguard Group Inc.

The yield on Japan’s two-year government debt has climbed above 1% in recent days to its highest level since 2008 as investors bet that BOJ officials led by Governor Kazuo Ueda will resume hiking benchmark borrowing costs at their Dec. 18-19 meeting. But after years of persistent easy monetary policy, the rate still remains far below Group-of-10 peers — even as inflation expectations in Japan are near their strongest mark in records going back to 2004.