The two-year rate, which is sensitive to monetary policy expectations, rose 3 basis points to 1.02%, while yields on other maturities also surged. The yen also strengthened as much as 0.5% to 155.4 against the dollar.
Swaps market traders ramped up bets for a hike this month after Governor Kazuo Ueda said the central bank will consider the pros and cons of raising the policy rate and make decisions as appropriate. In a closely watched speech, Ueda said the likelihood of its economic outlook being realised is rising, and conditions would still be accommodative even if the policy rate is raised.
“Growing expectations of a BOJ rate hike are helping the yen appreciate and putting upward pressure on the two-year JGB yield,” said Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corp. “Governor Ueda’s comments sounded slightly more hawkish than expected, and this may become the turning point for the yen.”
The governor’s comments mark “a significant shift from his remarks after the last monetary policy meeting,” and are driving yields higher across the bond curve, said Chidu Narayanan, chief APAC strategist at Wells Fargo in Singapore.
The yield on five-year notes jumped 7 basis points to 1.38%, while that on the benchmark 10-year bond added 7 basis points to 1.87%. the highest since 2008.
The swaps market is now pricing in an over 80% chance of a rate hike when BOJ delivers its next policy decision on Dec. 19, compared with 23% just a week ago. The likelihood rises to more than 94% by its January gathering.
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