(Oct 23): Japan’s 40-year government bond yield climbed to its highest level in 16 years amid growing speculation that the nation’s central bank will push ahead with interest rate increases in coming months.

The yield climbed 1.5 basis points to 2.535% in early trading in Tokyo on Wednesday. Bonds are slumping globally, with the 10-year Treasury yield also above 4%. Although the Bank of Japan (BOJ) is widely expected to keep its benchmark rate of 0.25% at its next policy meeting this month, the swaps market is signaling expectations that the central bank has about a 66% chance of a quarter-percentage-point rate hike by January.

Japanese Prime Minister Shigeru Ishiba said that he seeks to align with the BOJ, after his earlier remarks that the nation isn’t ready for more rate hikes. Comments from US Federal Reserve officials suggesting that they may be more cautious about cutting interest rates, and the yen’s slide against the dollar after rebounding sharply in September, are also seen by traders as helping the BOJ make the case for an additional rate increase.

The International Monetary Fund (IMF) is gaining confidence over the sustainability of Japan’s inflation, and expects the BOJ to proceed gradually with interest rate hikes, according to Nada Choueiri, the Japan mission chief, who spoke in an interview on Tuesday. The IMF expects a nominal neutral rate of about 1.5%, higher than private economists’ estimate of 1%.

Yields on 30- and 40-year sovereign bonds have also faced upward pressure due to decreased demand from life insurers, one of their main investors. The insurers had been increasing holdings of Japan’s longest bonds to comply with new regulations, but those deals appear to have run their course, market experts say.

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