Japanese govt bond yields climb as BOJ meeting begins with rate hike on table

BOJ Governor Kazuo Ueda

Japanese government bond (JGB) yields rose on Thursday as market players braced for an expected interest rate hike from the Bank of Japan (BOJ) at the conclusion of its two-day monetary policy meeting this week.

The 10-year JGB yield ticked up 0.5 basis point (bp) to 1.2%, while 10-year JGB futures fell 0.06 point to 140.96 yen.

Markets see a 95% chance that the BOJ will raise rates on Friday after policymakers last week left a hike on the table and U.S. President Donald Trump's inauguration passed without upending financial markets.

With a 25-bp hike all but completely factored in, further upward pressure on JGB yields will depend on any signals the BOJ drops regarding the pace of future increases.

Many market players expect the BOJ to take a cautious, gradual approach to future hikes and anticipate only two increases in 2025.

BOJ Governor Kazuo Ueda is likewise seen taking a careful tone when communicating the bank's future path if the BOJ raises rates to avoid causing market turmoil, said Ryutaro Kimura, a fixed income strategist at AXA Investment Managers.

"There remains a risk of a negative surprise for yen interest rates and renewed upward pressure if, contrary to investor expectations, Governor Ueda takes a more positive stance on further rate hikes," he said.

The BOJ last increased interest rates in July. That move, along with concerns about the state of the U.S. economy, took traders by surprise and triggered a rout in global markets in early August.

The two-year JGB yield and five-year yield each rose 0.5 bp to sit near recent highs at 0.695% and 0.875%, respectively.

On the super-long end, the 20-year JGB yield JP20YTN=JBTC climbed 1 bp to 1.895%, while the 30-year JGB yield was flat at 2.25%.