On Monday, August 17th, the Japanese bond market experienced a rare shift in nearly 30 years. The benchmark 10-year government bond yield touched around 2.93% during the session, rising to its highest level since 1996, just shy of the highly anticipated 3%. Meanwhile, the dollar/yen exchange rate returned to around 159, and Brent crude oil traded around $89 per barrel. Japan's second-quarter real GDP grew by only 0.3% quarter-on-quarter, an annualized rate of 1.1%, significantly lower than the market's previous expectation of around 2%. In other words, the Japanese market is simultaneously facing three sets of variables: weak growth, persistently high imported inflation pressures, and further normalization of monetary policy. The rise in the 10-year Japanese government bond yield to 2.93% superficially reflects investors increasing their pricing of a September rate hike by the Bank of Japan. However, from a term structure perspective, what is truly noteworthy is that medium- and long-term interest rates are regaining independent risk pricing power. The Bank of Japan maintained its interest rate at 1.0% on July 31st, but a proposal to raise the policy rate to 1.25% was made at that meeting, although it did not receive majority support. The next monetary policy meeting will be held from September 17 to 18, and market expectations for policy adjustments in September have risen significantly recently. This means that a 10-year yield approaching 3% cannot be simply interpreted as a mechanical transmission of rising short-term policy rates. Bond yields can be broken down into the future short-term interest rate path, inflation compensation, and term premium. When economic growth data falls short of expectations, but the 10-year yield continues to rise, the market is sending a very clear message: the main variables facing long-term bonds are no longer just actual growth, but also inflation stickiness, fiscal supply, and the additional compensation required by the holding duration. More importantly, the Japanese fiscal budget uses an interest rate assumption of approximately 3%. If market interest rates continue to approach the upper limit of the budget assumption, the sensitivity to new financing and debt refinancing costs will increase. For a bond market that has been in an ultra-low interest rate environment for a long time, the significance of this change is far greater than a few basis points of fluctuation on a single day. The second main theme in the recent Japanese bond market comes from exchange rates and energy. The yen previously rebounded rapidly from around 164 yen per dollar to around 155 yen, but subsequently gave back a considerable portion of its gains and is currently back around 159. Meanwhile, Brent crude oil fluctuated around $89 per barrel on August 17, after rising more than 5% in the previous week. These two variables are highly correlated with Japan. Energy imports are denominated in foreign currency. When a weak yen coincides with high international energy prices, import costs are doubly increased. These costs may then be passed on through import prices, corporate input prices, retail prices, and wage negotiations. Currently, market-implied inflation expectations are close to 2%, while the Bank of Japan's estimate of underlying inflation remains significantly lower. This gap explains why weak economic data has failed to suppress long-term yields. This is also the most significant difference between the current bond market and those of previous years. In the past, weak growth typically meant increased expectations of easing, supporting bond prices. Now, if weak growth and imported inflation occur simultaneously, monetary policy faces increased constraints. The bond market is therefore beginning to repric this policy dilemma. Japan's real GDP grew 0.3% quarter-on-quarter in the second quarter, an annualized rate of 1.1%, lower than the market's previous forecast of around 2%. More noteworthy is the growth structure. Data from the Cabinet Office shows that domestic demand contributed -0.2 percentage points to real GDP growth, while net exports contributed 0.5 percentage points. Private consumption was weak, and corporate capital expenditure also declined. According to traditional macroeconomic frameworks, weak domestic demand typically suppresses medium- to long-term interest rates. However, the 10-year yield still rose to 2.93%, indicating a shift in the bond market's focus. First, the slowdown in growth has not simultaneously eliminated price pressures. Second, the weaker yen increases uncertainty regarding imported inflation. Third, investors are beginning to reassess the central level of the Bank of Japan's future policy rate. Finally, as the central bank gradually reduces its price suppression in the bond market, long-term bonds must once again rely on market supply and demand to determine risk premiums. Therefore, the importance of 3% does not stem from the round number itself, but from its potential to become a new institutional benchmark after the era of ultra-low interest rates in Japan ends. If a new equilibrium is established between real growth, nominal growth, policy rates, and long-term government bond yields, Japanese financial institutions' asset and liability management, insurance fund duration allocation, bank bond investments, and corporate financing costs will all need to be readjusted.