Japanese government bonds hold steady as BOJ meets on policy

By Rocky Swift

Japanese government bonds were steady on Thursday as the nation's central bank begins a two-day policy meeting that will be closely watched for signs of future interest rate increases.

The Bank of Japan is widely expected to stand pat on key rates on Friday, though comments from Governor Kazuo Ueda will be scrutinised for hints of when it will resume its long-term normalisation strategy after massive, decade-long stimulus.

The benchmark 10-year JGB yield (JP10YTN=JBTC) rose 1 basis point to 1.6%, and the five-year yield (JP5YTN=JBTC) rose 0.5 bp to 1.150%, as of the midday break. Yields rise when bond prices fall.

The 20-year yield (JP20YTN=JBTC) fell 1 bp to 2.625%. Other tenors were flat or had yet to trade.

The BOJ meeting follows one by the U.S. Federal Reserve on Wednesday, where it came through on an expected rate cut and forecast two more this year.

The BOJ has delayed rate hikes as it assessed the impact of U.S. tariffs on Japan's economy, but is still expected to tighten by early next year, said Kei Fujimoto, senior economist at SuMi Trust Asset Management.

"We anticipate that the BOJ will carefully raise interest rates while assessing economic conditions and considering the impact on financial markets," Fujimoto said. "Consequently, going forward we expect the 10-year yield to rise gradually."

JGB yields have been on an upswing in recent months, with super-long-term rates hitting record levels. It is part of a global trend that reflects concerns over widening deficits of indebted nations and also Japan-specific issues, such as political uncertainty and waning support from the BOJ.

Prime Minister Shigeru Ishiba said last month he would step down, setting up a leadership race that includes candidates who are more fiscally dovish. The BOJ, meanwhile, is gradually reducing its regular purchases of JGBs.