The Bank of Japan continues to send signals, with expectations for an interest rate hike heating up next week, and the yield on 40-year Japanese government bonds reaches a record high

The top two officials of the Bank of Japan have hinted at the possibility of interest rate hikes, raising expectations for an increase next week, as the yield on Japan's 40-year government bonds climbs to a historic high.

On Tuesday, January 14, Bank of Japan Deputy Governor Masayoshi Amamiya hinted at the possibility of rate hikes during a speech to local business leaders in Yokohama, stating:

"It is difficult but crucial to judge the right timing when implementing monetary policy. The Bank of Japan's board will discuss whether to raise the policy interest rate based on the information gathered before the meeting."

Expectations for Rate Hikes Rise, Japan's 40-Year Government Bond Yield Hits Historic High

The next monetary policy meeting will be held on January 23-24. Previously, most market observers expected the Bank of Japan to raise rates in January or March.

Following Amamiya's remarks, the market reacted sharply. The yen fell 0.3% against the dollar to 158.02 before rebounding to around 157.50. Japanese government bond futures narrowed their losses, while the Tokyo Stock Exchange index dropped to its daily low. Overnight index swaps indicated that the market is betting on a 60% probability of a rate hike at next week's meeting, with the probability of a hike by March reaching as high as 83%.

Notably, last week, Bank of Japan Governor Kazuo Ueda also indicated in a speech that he would raise the benchmark interest rate if the economy continues to improve this year.

With signals of rate hikes being continuously released, combined with a global bond sell-off driven by inflation and fiscal concerns, Japan's 40-year government bond yield rose by 3 basis points to 2.755%, marking the highest level since the bond's first issuance in 2007, currently reported at 2.652%. The yield on Japan's 20-year government bonds also rose to its highest level since May 2011 this morning.

Meanwhile, due to strong non-farm payroll data released in the U.S. last week, traders have lowered their expectations for Federal Reserve rate cuts, causing long-term U.S. Treasury yields to soar. Shoki Omori, Chief Japan Strategist at Mizuho Securities, warned:

"As long-term U.S. Treasury yields rise, there is further room for Japanese bond yields to increase."

Market Risks Persist, Inflation Expectations May "Heat Up"

Amamiya also mentioned in his speech that there are various risks both domestically and internationally, and the momentum of wage growth this year, along with the economic policies of the new U.S. government, are worth monitoring:

"Wage growth is expected to remain robust this year. Surveys show that wage increases generally reach or exceed levels from a year ago, when unions and companies agreed to the largest pay raises in 30 years."

Regarding the uncertainty of U.S. economic policies, he stated that although the overall situation may become clearer with Trump's presidency, the Bank of Japan still needs to remain vigilant, and continuous monitoring is necessary. He cited many experts' views that the U.S. economy is expected to continue performing strongly in the near term, contrasting sharply with the downside risks that the market focused on around last August Officials from the Bank of Japan previously stated that they would raise interest rates if the economy continues to develop as expected. Eisuke Nishimura reiterated this position, emphasizing that the central bank does not wish to create surprises during non-economic crisis periods, but also pointed out that since the central bank's final decisions are made during meeting discussions, the market cannot fully digest the results of policy meetings.

Additionally, according to a previous article from Wall Street Insight, informed sources revealed that Bank of Japan officials may discuss raising inflation expectations at the meeting. This possible adjustment is mainly considering the recent surge in rice prices and the weakening trend of the yen since the outlook report was released last October.

Eisuke Nishimura stated that the development of prices and inflation expectations, including the underlying economic mechanisms, seems to have basically gotten back on track. If the outlook continues to be realized, the Bank of Japan will accordingly raise the policy interest rate and adjust the degree of monetary easing