Japan's 10-year government bond auction saw the weakest demand since May, with the bid-to-cover ratio falling to 2.57 from 3.3 last month. The decline reflects growing investor concerns over inflation as oil prices surged above $106 a barrel following renewed tensions with Iran. Existing 10- and 30-year Japanese government bonds also declined after the auction results.

Global bond yields climbed Thursday after President Trump warned of harsh measures against Iran in the coming weeks. The oil price spike has intensified inflation worries, prompting speculation that the Bank of Japan may need to tighten monetary policy sooner than expected. The yen weakened to 159.48 against the dollar after Trump's comments.

The weak auction results come as investors increasingly price in potential BOJ rate hikes. Overnight index swaps now show more than a 70% probability of a rate increase by April, with a 25-basis-point hike fully priced in by July. The 10-year JGB yield rose to 2.35%, approaching last month's peak of 2.39%.