Japan Sees Weakest Short-Term Bond Auction in 16 Years as BOJ Signals Time to Tighten

TradingKey - As calls for another rate hike grow louder among Bank of Japan (BOJ) policymakers and markets increasingly bet on a move as early as October, Tuesday’s auction of ¥2.7 trillion in two-year Japanese government bonds (JGBs) saw the weakest demand in 16 years.

The results of the two-year JGB auction, held on Tuesday, September 30, showed a bid-to-cover ratio of just 2.81 — well below the recent 12-month average of 3.79 — marking the lowest level since September 2009. 

The tepid investor appetite reflects growing market expectations that the BOJ could raise interest rates as soon as October. Following the auction, yields on two-year JGBs edged up to 0.935%, the highest since June 2008.

SMBC Nikko Securities said weak demand was driven by rising expectations of a BOJ rate hike in October and investor caution at the end of the quarter.

Hawkish Shift: Even “Doves” Are Turning

One day earlier, Asahi Noguchi, previously seen as a dovish board member, made a surprising hawkish turn, stating that steady progress has been made toward achieving the 2% price stability target, which makes the need to adjust policy rates greater than ever.

Mitsubishi UFJ Asset Management noted that Noguchi’s comments shifted market sentiment toward earlier tightening, while the ¥100 billion increase in the size of this month’s two-year bond issuance — rising from ¥2.6 trillion to ¥2.7 trillion — may have further dampened demand.

Meeting Minutes Signal Readiness for Hike

Minutes from the September BOJ meeting, released on Tuesday, revealed that although no decision was made to hike rates in October, the sustained inflation above target has opened the door.

One of nine board members said:

“It may be time to consider raising the policy interest rate again.”

However, given uncertainty over the U.S. economic outlook, maintaining a wait-and-see stance for now remains appropriate.

A growing consensus among board members is emerging: Even if most prefer to wait for more data, a rate hike will be necessary at some point due to persistent inflation.

The BOJ kept its benchmark rate unchanged at 0.5% in September — the fifth consecutive meeting with no change — mainly due to concerns about:

• The impact of U.S. tariff policies on the Japanese economy
• Fiscal uncertainty stemming from the upcoming Liberal Democratic Party leadership election

But one of the two dissenting voters in September suggested that concerns over external risks — including U.S. tariffs and global economic headwinds — have begun to ease.