Trading in Japanese bonds was halted for a period today after a second consecutive day of aggressive selling and yen traders are struggling to understand why.

Since Friday, yields on 10-year JGBs have rise to 0.75% from 0.60%. The current yield is the highest since February 6 despite the Bank of Japan promise to double quantitative easing.

Japanese 10 year bond yields May 13, 2013

Here are some explanations for the move:

  1. The market believes the BOJ will spur inflation
  2. The Nikkei rally has proven irresistible to institutional investors
  3. JGB investors are switching to Treasuries, or European bonds
  4. The falling yen is scaring away reserve managers
  5. Better economic growth is spurring a move to risk assets

In addition, the WSJ talks about potential problems with the BOJ buying more than 70% of new issues.

That means less supply for market participants, a situation that is exacerbated when investors get skittish and decide to sit on the sidelines. When someone does move, the shift is amplified.

What would really cause USD/JPY is an indication that the market is losing confidence in Japan to repay its debts but there are no signs of that.

At the moment, rising Japanese yields are a USD/JPY negative and should make longs cautious of a pullback.