The Bank of Japan faces mounting pressure to raise interest rates at its June 16 meeting, with markets pricing in a 70% chance of a move to 1%. Having already postponed an expected rate increase due to Middle East tensions, policymakers now confront rising inflation expectations and a yen that has nearly returned to the 160-per-dollar level that triggered May's currency intervention.

Japanese government bond yields have surged to multi-decade highs, with 10-year JGBs hitting 2.75% and 30-year bonds crossing 4% for the first time ever. This volatility complicates the BoJ's delicate exit from years of monetary easing, as steepening yield curves reflect structural shifts in domestic investor demand, particularly for ultra-long bonds.

The central bank has been unwinding its balance sheet since 2024, reducing monthly bond purchases from ¥2.5tn to a planned ¥2.1tn by April 2026. However, investor feedback from the May Bond Market Group meeting reveals mixed views on accelerating quantitative tightening, with some warning that further reductions could stress money markets while others see room for faster tapering.

Most likely, the BoJ raises rates in June but maintains or increases purchases of long-dated bonds to stabilize the yield curve. This approach would address credibility concerns while acknowledging that supply-demand imbalances in the 30-40 year segment require targeted intervention rather than broad policy changes.