BOJ Rate Hike Expectations Fuel Japanese Bond Market Volatility

The Japanese government bond market was relatively flat on Thursday, as investors braced for the Bank of Japan's expected rate hike in September.

The five-year JGB yield remained unchanged at 2.105%, which is near a record high level. The two-year yield, sensitive to BOJ policy rates, was also flat at 1.64%, its highest since May 1999.

According to Shuichi Ohsaki, senior portfolio manager at Meiji Yasuda Asset Management, 'the market now cares about the pace of the BOJ's rate hike rather than where the terminal rate is.' The September rate hike would be the second in three months, following a 25 basis point increase in June.

The expectations for the September rate hike grew after Japan and the US conducted a joint currency intervention at the end of last month. This lifted the yen's value, raising bets that the BOJ would need to raise rates soon to maintain momentum.