Japan Two-Year Yield Hits 1% as BOJ Rate Hike Bets Surge

Japan’s bond market sent a clear signal this week. The country’s two-year government bond yield touched 1%. Its highest level since 2008. The move reflects growing confidence that the Bank of Japan is close to raising interest rates. At the same time, longer term yields also climbed. The five-year yield rose to 1.35%. While the benchmark ten-year yield reached 1.845%. Meanwhile, the yen strengthened by 0.4% trading near 155.49 per dollar. The shift shows that traders now firmly believe Japan’s era of ultra loose monetary policy is ending.

Markets Now Price a December or January BOJ Move

Rate hike odds have surged in just two weeks. Swap markets now price in a 76% chance of a BOJ hike at the December 19 meeting. The probability rises to over 90% for January. Only two weeks ago, the odds of a December move sat near 30%. That sharp jump followed comments from BOJ Governor Kazuo Ueda. Who signaled a more flexible stance on policy tightening.

In a recent speech, Ueda said the bank will weigh both the pros and cons of a rate increase. He also noted that monetary conditions would remain accommodative even after a hike. That tone sounded more hawkish than before. Market analysts took notice. Strategists now view December as a real possibility rather than a distant gamble.

Yen Gains as Bond Yields Signal a Policy Shift

As yields pushed higher, the yen gained support. Rising rate expectations typically strengthen Japan’s currency by narrowing the gap with U.S. interest rates. Still, the yen remains under pressure. It has dropped roughly 5% this quarter. Which making it the weakest performer among major global currencies. That decline has added pressure on the BOJ to act faster.

Meanwhile, Japan’s inflation stays above the central bank’s 2% target. Which fuels criticism that policy remains too loose. Rising food, energy and service prices continue to squeeze households. Investors now see the latest bond moves as a turning point. The two-year yield, which closely tracks rate outlooks. It rarely moves this fast unless a shift feels close.

Debt Issuance and Inflation Add More Pressure

Japan’s Finance Ministry is also adding stress to the bond market. The government plans to increase short-term debt issuance to help finance Prime Minister Sanae Takaichi’s economic stimulus package. The plan includes issuing ¥300 billion each in two and five-year bonds. It also adds ¥6.3 trillion in Treasury bills. That supply is expected to weigh further on short-term bonds.

At the same time analysts warn that fiscal spending could reignite inflation. Just as the BOJ prepares to tighten policy. This mix of higher supply and higher prices makes the bond market nervous. A recent two-year bond auction saw weak demand. This is another sign that investors are cautious. Currently, Japan’s bond surge reflects one simple message. The rate hike debate has moved from “if” to “when,” after years of waiting. That moment may finally arrive within weeks.