Japan¡¯s two-year note yield rose to its highest level since 2008, and the yen gained against the dollar on signs an interest-rate hike by the Bank of Japan is getting closer.
The two-year rate, which is sensitive to monetary policy expectations, rose one basis point to 1%. Yields on both five-year and benchmark 10-year bonds climbed about four basis points to 1.35% and 1.845% respectively. Japan¡¯s currency strengthened as much as 0.4% to 155.49 against the dollar.
In a closely watched speech on Monday, BOJ Gov. Kazuo Ueda said the central bank will consider the pros and cons of raising the policy rate and make decisions as appropriate. The likelihood of its economic outlook being realized is rising, and conditions would still be accommodative even if the policy rate is raised, he said in Nagoya.
¡°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. ¡°Gov. Ueda¡¯s comments sounded slightly more hawkish than expected, and this may become the turning point for the yen.¡±
Expectations for a rate hike this month increased. The swap market is now pricing in about a 76% chance of a rate hike when the BOJ delivers its next policy decision on Dec. 19, with the likelihood rising to more than 90% by its January gathering. That compares with 30% for a December move just two weeks ago.
¡°Ueda is still hedging his language, but by saying if rates are raised it is still accommodative it sounds like he is in favor of a December move,¡± Bloomberg strategist Mark Cranfield said.
Separately, the Finance Ministry plans to increase its issuance of short-term debt to help finance Prime Minister Sanae Takaichi¡¯s economic package, adding issuance of two¡ª and five-year notes by ?300 billion ($1.92 billion) each and Treasury bills by ?6.3 trillion. That¡¯s set to weigh on shorter-end sovereign bonds.
It¡¯s ¡°prudent to remain cautious¡± about bonds right now, said Ryutaro Kimura, senior fixed-income strategist at AXA Investment Managers. The market has to take into account ¡°the anticipated re-acceleration of inflation under the fiscal expansion of the Takaichi administration and the deterioration in the supply-demand balance due to a substantial increase in medium-term JGB issuance.¡±
The mounting speculation of a December hike comes as the yen has slumped 5% against the dollar this quarter, making it the worst performer among Group-of-10 currencies. Japan¡¯s inflation has been consistently running above the BOJ¡¯s 2% target, fueling criticism that the central bank is behind the curve in raising rates.
A two-year note auction late last week met weak demand, indicating how investors are cautious given the increasing rate hike risk.
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