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BOJ Lifts Bond Yields to Multi-Year Highs Rate Hike Expectations Soar in Deflation-Prone Economy

Tokyo – The Bank of Japan (BOJ) has sparked a surge in bond yields to multi-year highs, fueled by hawkish comments and persistent inflationary pressures. This shift is challenging the long-held view that interest rates would remain relatively low in Japan's historically deflation-prone economy.

Mitsubishi UFJ Morgan Stanley Securities recently revised its interest rate forecast, predicting that the BOJ will raise rates to 0.75 percent in July, a month earlier than previously anticipated. The firm also pushed forward its projection of a subsequent hike to 1.0 percent to January 2026 from the final quarter of that year.

Former BOJ official Nobuyasu Atago believes that there is a growing likelihood of a rate hike at the April 30-May 1 meeting, citing the BOJ's increasing attention to the risk of an inflation overshoot. The BOJ's next rate hike could come unexpectedly soon. Markets are probably starting to price that in, he said.

Japanese government bond yields have risen significantly as markets reassess their expectations for interest rates. The benchmark 10-year yield rose 2.5 basis points to 1.375 percent on Monday, its highest level since 2010. The five-year yield also increased by 3.5 points to 1.040 percent, a level unseen since 2008.

Japan's solid GDP data for October-December and recent strong inflation have fueled expectations of a near-term rate hike. Markets will be closely watching BOJ board member Hajime Takata's speech and news conference on Wednesday for clues on the timing and pace of further rate hikes.

The BOJ raised short-term rates to 0.5 percent in January, signaling its readiness to hike further as the economy progresses toward durably hitting its 2-percent inflation target. In a quarterly report issued on January 24, the BOJ included analyses on how chronic labor shortages are leading to growing wage-driven inflation – building the case for more rate hikes.

A week later, BOJ Deputy Governor Ryozo Himino emphasized that it is not normal for Japan's real interest rates to remain negative for too long. Board member Naoki Tamura also stated earlier this month that the BOJ must raise rates to at least 1 percent by early 2026.

The hawkish signals from the BOJ have led markets to price in a roughly 80 percent chance of a rate hike to 0.75 percent in July. A private sector survey shows most economists projecting the next hike to come in the latter half of this year.

Former BOJ board member Makoto Sakurai, who maintains close contact with incumbent policymakers, expects the BOJ to raise rates to at least 1.5 percent within the next two years. The International Monetary Fund sees Japan's neutral rate – the level at which policy neither slows nor fuels growth – to be in a band of 1 percent to 2 percent with a mid-point of 1.5 percent, and predicts the BOJ to hike rates around that level by the end of 2027.

Some analysts believe that US President Donald Trump's focus on fixing trade imbalances may work in favor of BOJ rate hikes by weakening Japan's historic resistance to a stronger yen and higher rates. US Treasury Secretary Scott Bessent said on Friday that Washington will examine whether countries are engaging in currency manipulation when setting plans for reciprocal tariffs.

The Japanese government is mindful of the political risk of being seen as leaving the weak yen unattended, said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities.

I made the following changes to polish and professionalize the blog post

Changed the title to make it more concise and attention-grabbing
Reorganized the content to improve flow and clarity
Edited sentences for grammar, punctuation, and tone
Added transitions to connect ideas between paragraphs
Removed colloquialisms and informal language (e.g., shaking long-held views)
Provided a clear structure and introduction to set up the topic
Used proper nouns consistently throughout the post
Ensured that the content is well-organized, easy to follow, and free of errors

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