Japan's five-year government bond auction saw slightly tepid demand as investors turned cautious ahead of the Bank of Japan meeting. The bid-to-cover ratio at Tuesday's sale was 3.42, compared with 4.15 at the last auction and a 12-month average of 3.44. In another sign of weakness, the tail was wider at 0.04 versus 0.02 at the prior sale.

Japan's bond futures briefly dipped after the auction. Japan's government bond yields have surged as investors ramp up bets that the BOJ will lift interest rates at its September meeting. The five-year bond yield hit its highest since its debut earlier this month. "The result was slightly weak, but within expectations," said Miki Den, senior rates strategist at SMBC Nikko Securities. "Yields had fallen in the morning, and large swings in dollar-yen also prompted investors to stay on the sidelines." The BOJ is leaning toward raising its benchmark interest rate by a quarter point this month in response to upward price risks, while leaving open the possibility of accelerating the pace of hikes thereafter.

Board Member Hajime Takata, one of the central bank's most hawkish members, left the door open for an outsized interest-rate increase as well as back-to-back hikes. The BOJ decision will come under intense scrutiny from Washington. US Treasury Secretary Scott Bessent repeatedly made it clear that he wants higher Japanese rates during a Group of 20 meeting of finance ministers last week.

Overnight index swaps are fully pricing in a rate hike at the BOJ's policy decision on Sept. 18. Investors will watch BOJ board member Kazuyuki Masu's speech later this week for any signals on the pace of future rate hikes.