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Theme · past 12 monthsJapan

Japan leaves ultra-low rates behind

The BoJ is normalising in small steps from a very low base, so the JGB curve steepens while the long end prices the risks.

What it did to the curve

Front end

Yields higher

2-year

Long end

Yields higher

10–30-year

Curve

steeper

long minus short

The JGB 2-year rose from 0.890% (6 Oct 2025) to 1.915% and the 10-year from 1.670% to 3.01% (13 Oct 2026), so 2s10s steepened from about +78bp to about +110bp, with record 30-year yields.

BoJ policy rate

1.25%

up+75bp on the year

Three hikes: 0.75% (19 Dec), 1.0% (16 Jun) and 1.25% (18 Sep), the highest in about 31 years.

JGB 2s10s, 13 Oct

~+110bp

upfrom ~+78bp a year earlier

The curve steepened as the long end priced inflation and fiscal risk faster than the BoJ hiked.

JGB 30-year record

4.235%

up5 Oct

An all-time high. The 10-year hit 3.055% on 24 Sep, its highest since August 1996.

JGB 2-year high

1.975%

up28 Sep, highest since March 1995

Where bets on the next hike show up. It was 0.890% a year earlier.

What happened

A year ago Japan’s policy rate was 0.50% and the 10-year yielded 1.670%. When Sanae Takaichi won the LDP leadership in early October 2025, the 2-year fell 5bp and the curve steepened. Markets bet on a slower BoJ and looser : more government spending and borrowing.

The BoJ kept going anyway. It hiked to 0.75% in December, the highest since September 1995, then to 1.0% in June. The move to 1.25% on 18 September came after the shortest gap between hikes under Ueda.

Oil and a weak yen raised import costs. The BoJ’s FY2026 core CPI forecast went from 1.9% in January to 2.8% in April. In late July the yen hit a 40-year low and Japan appeared to .

The curve steepened, unlike the US curve, because the BoJ moved in small, signalled steps from a low base. Meanwhile the long end priced risks the BoJ doesn’t control: inflation that might not fall back, and fiscal worries. The also cuts BoJ purchases by ¥200bn a quarter until April 2027, leaving more bonds for private buyers.

By 13 October the 2-year was 1.915% and the 10-year 3.01%. That took 2s10s from about +78bp to about +110bp. The 30-year set a record 4.235%.

The front end is now the battleground. Ueda said on 16 October that underlying inflation is near 2% and rates will keep rising; a December hike is priced at about 75–88%. The long end answers to politics too. Yields fell on 30 September on a report that Takaichi would vow a nimble response to markets, and the 10-year has eased to about 2.9%.

Timeline

  1. · Japan

    BoJ holds at 0.5% (7–2) at its first meeting under PM Takaichi; two members want 0.75%

  2. · Japan

    BoJ hikes to 0.75% (9–0), the highest since September 1995

  3. · Japan

    BoJ hikes to 1.0% with Ueda absent; the bond-buying taper continues to April 2027

  4. · Japan

    BoJ holds (8–1) after the yen hits a 40-year low and Japan appears to intervene

  5. · Japan

    BoJ hikes to 1.25% (7–2), the shortest gap between hikes under Ueda

  6. · Japan

    JGB 30-year sets a record 4.235%

  7. · Japan

    Ueda says underlying inflation is near 2% and the BoJ will keep raising rates

What could change it

Base case

The BoJ holds on 30 Oct but keeps December in view, as officials signalled on 13 Oct, and Ueda’s line that rates will keep rising holds. The front end edges up and the curve stays steep.

Watch: BoJ, 29–30 Oct · FOMC, 9 Dec

Faster BoJ

The BoJ hikes back to back on 30 Oct, the faster tightening the IMF said may be needed if inflation beats forecasts, with the yen near 158 as a spur. The 2-year pushes towards 2% and the curve flattens from the front.

Watch: FOMC, 27–28 Oct · BoJ, 29–30 Oct

Long-end pushback

The long end gets help: Tokyo follows through on its nimble-response pledge or asks the BoJ to buy more JGBs, and the Outlook Report trims inflation forecasts again, as July’s did after energy subsidies. 30-year yields fall from records and 2s10s flattens from the long end.

Watch: US PCE, 29 Oct · BoJ Outlook Report, 30 Oct

How desks express it

JGB 2s10s steepener

Curve

Buy 2y JGBs, sell 10y JGBs (DV01-neutral)

Normalisation from a low base steepens the curve: the BoJ moves in small steps while the long end prices inflation, fiscal risk and less BoJ buying.

  1. 1

    The BoJ signals each 25bp move, so the 2-year rises in measured steps.

  2. 2

    The long end must absorb more bonds as the taper cuts BoJ purchases by ¥200bn a quarter, and it carries the fiscal and inflation risk.

  3. 3

    That is how 2s10s went from about +78bp to about +110bp over the year; a earns it if normalisation continues at this pace.

Wrong if: Tokyo leaning on the long end: yields fell on 30 Sep on a report that Takaichi would vow a nimble response to markets, and she reportedly asked Ueda in May to buy more JGBs if needed. The curve has already flattened to about +100–110bp as the 10-year eased towards 2.9%, and a back-to-back hike on 30 Oct would flatten it further from the front.

Pay the yen front end

Outright

Pay 2y TONA OIS

If the BoJ keeps hiking as Ueda signalled, 2-year yen rates have further to rise.

  1. 1

    Ueda said on 16 Oct that underlying inflation is near 2%, can’t be allowed to accelerate further, and the Bank will keep raising rates.

  2. 2

    In September the BoJ said CPI ex fresh food should run clearly above 2% from the second half of FY2026, and on 17 Oct the IMF said it may need to tighten faster.

  3. 3

    Paying fixed gains as the market prices more hikes, in December and beyond.

Wrong if: A long pause: officials leaned against an October hike, and if the Outlook Report on 30 Oct trims inflation forecasts, as July’s did after energy subsidies, the front end rallies. A sharp yen rally would also take pressure off the BoJ.

Educational expressions of the theme — how a desk might position, not advice.

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