(Bloomberg) -- Japan’s 10-year sovereign bond yield reached the key psychological level of 1% for the first time since the Bank of Japan ramped up unprecedented stimulus measures in 2013. 

The focus turns now to how quickly the super-easy monetary policy will be dialed back and how much further yields may rise. Those for 20- and 30-year bonds have reached decade highs recently, with inflation sticking above the central bank’s 2% target for two years, and analysts see them likely to climb more.

“If rate expectations are going to increase, Japanese government bond yields across the curve, particularly for the 10-year, are going to rise more,” said Shoki Omori, chief desk strategist at Mizuho Securities Co. The 10-year yield may go as high as 1.2% in coming weeks, he said.  

The yield on benchmark rose two basis points Wednesday to the highest level since May 2013. That’s significant for the market because it was previously the reference point for the BOJ’s yield-curve control policy, which was abolished in March, at the same time that policymakers axed negative rates. 

Swap markets are pricing in about a 60% chance of another rate hike by the late July meeting, compared with 14% at the time of the BOJ’s historic March policy decision.

Goldman Sachs Group Inc. strategists have predicted Japan’s 10-year sovereign yield will rise to 2% by the end of 2026 on expectations the central bank will deliver a “prolonged” tightening cycle.

As speculation swirls that the BOJ may raise rates again to hinder further plunges in the yen, the Japanese currency has remained weak even as the nation’s bond yields rise.

The yield gap between the US and Japan remains wide, especially for shorter notes, which are used in carry trades to borrow cheaply in one country to invest in higher-yielding assets in another, according to Shusuke Yamada, head of Japan currency and rates strategy at BofA Securities Japan. 

The yen isn’t going to strengthen just because the yield differential has narrowed a little, and a decrease in market volatility has made carry trades even more appealing for investors, he said.

BOJ outlook

The central bank’s view on the inflation outlook is under intense focus, with Governor Kazuo Ueda saying earlier this month that the BOJ could raise rates if the price trend rises as expected. 

It may raise rates at the next policy meeting, while quantitative tightening to unload some of the assets it’s accumulated will probably be on the table, Tom Kenny, senior international economist at Australia & New Zealand Banking Group Ltd., wrote in a note. Recent remarks from senior BOJ officials suggests there is “little tolerance” for upside risk to inflation, Kenny wrote. 

The next BOJ policy meeting is on June 13-14.

Japan’s bond yields have also faced upward pressure on speculation the central bank will reduce the amount of debt it purchases at regular operations, after it did so on May 13. It didn’t repeat that at a subsequent operation. The next operation is slated for Thursday. 

“There’s some concern the yield will continue to rise above the 1% line,” after the BOJ’s reduction of bond buying at the May 13 operations, said Keiko Onogi, senior JGB strategist at Daiwa Securities Co. 

--With assistance from Daisuke Sakai.

(Adds strategist comments. A previous version of this story corrected size and scope of the move to 1%.)

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