As expectations of interest rate hikes grow, Japan's two-year government bond auction attracts a lot of attention.

With investors' expectations for a rate hike by the Bank of Japan increasing, the two-year government bond auction held in Japan on Thursday attracted much market attention. The market expects demand for this auction to remain robust. Data shows that the yield on two-year Japanese bonds is around 0.87%, only a few basis points lower than the highest level since 2008; the yield on five-year Japanese bonds is around 1.16%, also close to the level seen 17 years ago. The market's warming expectations for a rate hike by the Bank of Japan are driven by the resilience of Japan's economic growth and stubborn inflation. Data released last Friday showed that Japan's core CPI rose by 3.1% year-on-year in July, higher than the market's expectation of 3%, and well above the Bank of Japan's 2% target. The forward market indicates a 70% possibility of the Bank of Japan raising rates again before the end of the year. In addition, US Treasury Secretary Benson has stated that the Bank of Japan is "lagging behind the situation" in terms of raising rates. At the annual Jackson Hole Symposium of the Federal Reserve, Bank of Japan Governor Kikuo Ida stated that Japan's tight labor market may continue to drive wage increases. This further intensifies speculation in the market that the Bank of Japan may take action as early as the monetary policy meeting in October. The market currently estimates a 53% chance of the Bank of Japan raising rates in October. Omar Slim, Co-Head of Asia Fixed Income at PineBridge Investments, said: "I believe the short end and even the middle of the curve will be more stable, while the long end is still plagued by fiscal concerns." "There is increasing evidence that Japan is experiencing domestic inflation, and I believe Kikuo Ida is eager to take action. I expect the Bank of Japan to raise rates by 25 basis points before the end of the year." Bloomberg strategist Mark Cranfield pointed out: "Japanese bond traders may be in a wait-and-see mode before the release of demand data for today's two-year government bond auction. Typically, two-year bond auctions do not cause much excitement, but in the current highly sensitive environment of the Japanese government bond market, each bond issuance brings additional risk to the yield curve." The yield on Japan's super long-term government bonds is also rising, as the Bank of Japan gradually reduces its large-scale bond purchase program. In addition to rising inflation concerns, expectations for the Japanese government to implement new fiscal stimulus policies following the ruling coalition's defeat in the upper house elections in July have also raised concerns about an increase in Japan's bond issuance size.