Yields on Japanese government bonds (JGBs) climbed after Bank of Japan (BOJ) Governor Kazuo Ueda hinted that interest rate hikes could be on the horizon, contingent on economic trends aligning with the central bank's forecasts.

The two-year JGB yield reached its highest point since 2008, while the 10-year yield rose 2.5 basis points to 1.075%. Ueda’s comments, shared in a Nikkei interview, raised expectations of a potential rate hike as soon as December, with market instruments pricing a 60% probability for that month and nearly 90% by January.

The upward movement in JGB yields also mirrored an increase in US Treasury yields, with the 10-year note rising by 5 basis points to 4.22%. Market participants are also closely watching the release of US nonfarm payroll data for further indications on monetary policy.

Ataru Okumura, a senior rate strategist at SMBC Nikko Securities, interpreted Ueda’s remarks as a deliberate signal to prepare markets for a December rate adjustment, emphasizing the BOJ’s focus on clear communication to avoid market disruptions similar to those seen after the unexpected July rate hike.

Additionally, Ueda noted that inflation in Japan must consistently approach the 2% target and highlighted the BOJ’s vigilance on US economic developments, particularly in light of the incoming administration. The yen weakened to 150.55 against the dollar amid broad dollar strength and US political developments, including President-elect Donald Trump’s warnings to BRICS nations about currency alternatives and threats of tariffs.

The markets are expected to closely monitor upcoming US economic data to gain insights into the trajectory of monetary policies and the dollar-yen dynamic. Alvin Tan, head of Asia FX strategy at RBC Capital, remarked that the BOJ’s potential rate hike is already priced in, softening the surprise factor of Ueda’s comments.

Paraphrasing text from "Bloomberg" all rights reserved by the original author.