By Megumi Fujikawa


TOKYO--The failure of peace talks between the U.S. and Iran has raised fears of an energy supply shock and accelerating inflation, driving Japan's benchmark government bond yield to a nearly 30-year high.

The yield on 10-year JGBs rose to 2.490%, its highest level since June 1997, according to data provider Quick. Such moves in yields, which trade inversely to prices, tend to signal a loss in investor confidence in inflationary control.

As investors flee to the safe-haven dollar, the yen has weakened to around 159.75, adding to concerns about higher import prices. The currency nearing the 160 line also puts traders on alert for potential intervention.

The market moves followed the collapse of U.S.-Iran peace talks over the weekend, and a new order from President Trump saying that the U.S. Navy would begin blockading "any and all ships trying to enter or leave the Strait of Hormuz"--a vital shipping line for energy and other commodity exports from the Middle East.

The news caused a jump in oil prices back above $100 a barrel, resurfacing fears about higher inflation in Japan, which relies on the Gulf region for more than 90% of its crude imports.

Many investors expect the Bank of Japan to raise interest rates as early as this month to prevent higher energy prices from derailing the nation's fragile economic recovery, expectations that have led to a rise in government bond yields. Concerns about fiscal policy expansion have added to the rise in bond yields too.

While the possibility of resuming negotiations remains, it is difficult to envision an early resolution to rising oil prices, said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities.

"Under these circumstances, a persistent weak yen would also put upward pressure on the prices of goods other than crude oil, such as food, ultimately weighing down real income," she said.

Japan's top trade negotiator, Ryosei Akazawa, said Sunday that an interest-rate increase could be one way to ease inflationary pressures by bolstering the value of the yen.

"The BOJ's inflation target is now significantly closer to being achieved," the trade minister said. "Given that real interest rates remain quite low, I believe that considering a shift in that direction--while monitoring the impact on the economy--can be one option" for dealing with the crisis.


Write to Megumi Fujikawa at megumi.fujikawa@wsj.com


(END) Dow Jones Newswires

04-12-26 2313ET