MediumIV Macro Policy & Sovereign Debt28 September 2026, Monday

Japan's two-year yield hits highest since 1995 as October hike is priced

Japan's 2-year government bond yield rose to 1.975% on 28 September, its highest level since 1995. Money market broker Tokyo Tanshi puts the probability of the Bank of Japan (BoJ) raising its policy rate from 1.25% to 1.5% in October at 36%.

Location: TOKYO

Finimize reported that the 2-year yield, the maturity most sensitive to the policy rate, rose to 1.975% on 28 September, a level not seen since 1995. The BoJ's policy rate stands at 1.25% after the hike at its September meeting, and the market is pricing the next step at 1.5%. Tokyo Tanshi calculates the probability of a hike in October at 36%, while a hike by December is almost fully priced in. The 1-month interest rate swap starting in two years rose to a record 2.5%. That contract shows the market's expectation of short-term rates two years ahead. According to the same report, the 2-year yield slipped to 1.945% ahead of the auction.

Trading Economics data show the 10-year yield at 3.10%, the 2-year yield at 1.95% and the 30-year yield at 4.18% as of 30 September. According to the same source, the 10-year yield pulled back from a 30-year high after strong auction demand. Concern about energy-driven inflation persists, feeding expectations that the policy rate, now at 1.25%, will be raised faster. The same source said a former BoJ official suggested the bank could raise rates for a 2nd consecutive time at its October meeting. The date of the October meeting and the size of the auction could not be verified, as neither source gives them.

Talay assessment

Bottom line

Front-end Japanese yields are pricing a BoJ that will not stop at 1.25%; the debate has shifted from whether there will be a hike to when. The 36% probability for October sits on a curve where a hike by December is seen as all but certain. This means the cost of decades of low-rate yen funding has risen for good.

Likely effects

Yen carry tradesNegativeWeeks
Carry trades that borrow in yen to invest in higher-yielding assets are becoming costlier; an unwind could trigger sudden sell-offs in global risk assets.
Global extended maturitiesNegative1–6 months
Rising Japanese yields could reduce Japanese investors' demand for foreign bonds and add upward pressure on longer-dated rates in the US and Europe.
TürkiyeNegativeWeeks
If the unwinding of carry trades leads to outflows from emerging market assets, Turkish assets and the lira could also be hit by the wave.

Possibilities, ranked

1
Hold in October, hike in December55%
The BoJ holds rates in October and raises them to 1.5% in December; the 2-year yield fluctuates around 2%.
Watch: The BoJ's October meeting decision and Tokyo Tanshi probabilities
2
Hike in October35%
Under energy-driven inflation pressure, the BoJ delivers a 2nd consecutive hike in October, and the 2-year yield passes 2%.
Watch: The 2-year yield moving lastingly above the 2% threshold
3
Cycle pauses10%
Market turbulence or government pressure leads the BoJ to postpone hikes, and front-end yields pull back.
Watch: An open call from the government for the BoJ to delay

Probabilities are calibrated judgement based on the sources, not measurement, and are revised as new information arrives. Not investment advice.

Market reaction

Indicators affected

Japan 30Y, 30 September▲ 4.18%
Japan 2Y, 28 September▲ 1.975%
Probability of October hike▲ 36%

Historical context