Government bond yields rose across Asian markets on Tuesday, with Japan’s benchmark 10-year yield reaching 3% for the first time in 30 years amid inflation worries and mounting fiscal strains.

The rise in borrowing costs continued to pressure Japanese equities, particularly technology and artificial intelligence-related shares. It followed a volatile Monday session, when the Nikkei share average closed virtually flat amid a mix of tech-sector anxiety and macroeconomic headwinds.

Those equity gains remain capped by geopolitical risks in the Middle East and rising domestic inflation concerns, especially as market consensus builds around an imminent Bank of Japan interest rate hike in September.

Analysts see a high probability of a Bank of Japan rate hike

Bond yields moved higher alongside those in other Asian and global markets on Tuesday morning. South Korea’s 10-year government bond yield rose 0.06 percentage points to above 4.37%, while Australia’s benchmark yield climbed to a five-week high above 5.1%. Yields on 10-year debt in New Zealand and Singapore also edged higher. The 10-year U.S. Treasury yield had also hit a peak of 4.76% overnight.

Some of the increases were linked to escalating conflict in the Middle East, which pushed Brent crude futures up 0.7% to nearly $91 per barrel and intensified concerns about global commodity supply. Even so, the broader move has increased expectations for additional central bank rate hikes.

According to CME FedWatch metrics, markets currently price in better than a 60% chance that the U.S. Federal Reserve will raise interest rates at its September meeting.

Beyond global macroeconomic factors, Japanese market sentiment is being hurt by structural fiscal pressures and weakening supply-and-demand dynamics in the domestic bond market. Based on Totan Research and Totan ICAP data, the probability of a near-term increase in the bank rate stands at 93%.

Japan will sell its 10-year government bonds on Tuesday afternoon. Michael Wan, a senior currency analyst at MUFG Bank in Singapore, said the sale would show investors’ stance on higher yields in developed bond markets around the world.

Some Japan AI-related shares declined

Most AI-related stocks, which carry substantial weight in Japan’s Nikkei index, fell on Monday. Cable maker Fujikura dropped 3.5%, while conglomerate SoftBank Group fell 3.3%. Semiconductor equipment makers rose, however, with Tokyo Electron gaining 2.1%.

Japan’s Topix index ended slightly higher, up 0.1%, even as new costs weighed on corporate profit margins in the technology industry. Chipmaker Nvidia recently told its best customers they should prepare for an increase of more than 15% in AI server prices because of rising memory costs.

The weaker performance of AI-oriented Japanese stocks comes as investors question whether the extraordinary rally in technology shares can continue at the same pace. Semiconductor and AI companies have benefited from strong demand for data centers, advanced chips and computing solutions, but rising financing costs are making the environment more difficult.

Investors are now weighing whether corporate earnings can still justify elevated valuations as bond yields rise. If AI spending cuts or pressure on profit margins materialize, companies that enjoyed major gains during the AI boom could see their shares fall, especially those with the sharpest earnings gains.

At the same time, Japan’s semiconductor sector remains strategically important, supported by government efforts to boost domestic chip production and attract investment in advanced manufacturing. That could provide longer-term support even if higher interest rates create short-term volatility.

Wataru Akiyama, an equities strategist at Nomura Securities, said on the outlook for margins at global technology companies: “We view the concerns over the profitability of semiconductor-related companies — led by Nvidia — as little more than a pretext or trigger for selling,” following “a significant build-up of open positions in margin trading recently. I think it is fair to say that the outlook for earnings growth in AI and semiconductor-related stocks has not changed.”

He also said that with fixed-income returns rising amid inflation concerns, Japanese stock market indices are not well positioned to sustain a prolonged rise at this point.

On the brighter side, Japanese companies increased capital expenditures in the second quarter, indicating confidence in business conditions.

Some economists said higher capital spending could improve Japan’s growth outlook and give the Bank of Japan room to raise interest rates in the near future.

According to figures released by the Ministry of Finance, Japanese capital expenditures rose 1.6% in the second quarter from a year earlier, a notable pickup from 0.05% growth in the previous three-month period.