Global Market: Japanese bond yields rise as oil surge, hawkish BOJ remarks lift rate hike bets

Japanese government bond yields rose on Thursday as escalating tensions in the Middle East pushed oil prices higher, while hawkish comments from a Bank of Japan official strengthened expectations of further monetary policy tightening, Reuters reported.

The benchmark 10-year JGB yield climbed 5 basis points to 2.93%, while the two-year yield, which is particularly sensitive to monetary policy expectations, rose 1.5 basis points to 1.845%.

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Yields moved higher after BOJ board member Kazuyuki Masu said the central bank could be forced to raise interest rates rapidly if inflation accelerates, given Japan's still-accommodative financial conditions, according to Reuters.

The BOJ is widely expected to raise interest rates at its policy meeting next Friday, with investors closely watching for signals on the pace of further tightening.

Read more: Global Market Today: Asian stocks fall as oil stokes inflation fears

Mizuho Securities senior market economist Yusuke Matsuo expects Governor Kazuo Ueda to maintain a hawkish stance at his post-meeting press conference while explaining the need for additional rate hikes. However, Matsuo also warned that the central bank's communication could be interpreted as less hawkish than markets anticipate.

Rising oil prices added to pressure on Japanese bonds. Iran said on Wednesday that it had attacked 10 ships near the Strait of Hormuz after the United States sank five Iranian oil tankers, in the biggest wave of attacks on shipping by both sides since the six-month-old war began.

Brent crude rose above $100 a barrel following the escalation, marking its first move above that level since late July.

Longer-dated JGB yields also climbed. The 20-year yield rose 5 basis points to 3.75%, while the 30-year yield advanced 5.5 basis points to 4.01%.

The five-year yield increased 3 basis points to 2.25%.

The combination of rising energy prices and expectations of further BOJ tightening has increased pressure on Japanese government bonds, as investors assess the impact of renewed inflationary pressures on the central bank's policy path.

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