Japan’s Bond Yields Surge as BOJ Rate Hike Looms

Japan’s two-year bond yield hit 1%, the highest since 2008, reflecting rising BOJ rate hike expectations.

Market now prices 76% chance of December hike, rising above 90% for January, following Ueda’s hawkish comments.

Finance Ministry to issue ¥6.3T in Treasury bills, adding supply pressures on short- and medium-term JGBs.

Japan’s two-year government bond yield climbed to 1%, the highest since 2008, signaling growing market expectations of a Bank of Japan rate hike. The five-year and ten-year yields rose to 1.35% and 1.845% respectively, while the yen strengthened 0.4% to 155.49 against the dollar. Analysts link the movement to BOJ Governor Kazuo Ueda’s recent comments.

Governor Ueda’s Comments

In a speech on Monday in Nagoya, BOJ Governor Kazuo Ueda said the bank would weigh the pros and cons of raising the policy rate. He added that even with a rate increase, conditions would remain accommodative. According to Bloomberg strategist Mark Cranfield, Ueda’s remarks suggested a potential December hike, noting that the central bank’s economic outlook had strengthened.

Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking, said Ueda’s slightly hawkish tone contributed to yen gains and pressure on two-year yields. The comments followed growing investor expectations, which now price in a 76% probability of a rate hike at the BOJ’s December 19 meeting. By January, market pricing rises to over 90%, compared with only 30% two weeks earlier.

Rising Yields and Short-Term Debt Issuance

Yields on five-year and ten-year Japanese government bonds also rose, reflecting increased demand for higher returns amid anticipated policy tightening. Separately, the Finance Ministry plans to boost short-term debt issuance to fund Prime Minister Sanae Takaichi’s economic package. This includes adding ¥300 billion ($1.92 billion) in two- and five-year notes and ¥6.3 trillion in Treasury bills.

Ryutaro Kimura, senior fixed-income strategist at AXA Investment Managers, said investors remain cautious given rising issuance and fiscal expansion, which may impact supply-demand balances in medium-term bonds. A recent two-year note auction drew weak demand, highlighting caution in the market as rate hike expectations rise.

Yen Strength and Inflation Pressures

The yen has strengthened 0.4% against the dollar, partly due to speculation over higher rates. This quarter, it fell 5%, making it the worst performer among Group-of-10 currencies. Japan’s inflation has consistently exceeded the BOJ’s 2% target, fueling debate over whether the central bank has lagged in tightening monetary policy.

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