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TOKYO: Japan’s 9-year government bond yields rose to nearly 0.3% in early trade on Wednesday, while those of the 10-year bonds stayed at the upper limit of the central bank’s policy band, as markets test the Bank of Japan’s resolve to pin down interest rates.

The BOJ is expected to keep its ultra-low policy at a two-day meeting ending on Thursday, even as Japan’s inflation has hit its fastest annual pace in nearly eight years and the yen is tanking as money flows from Japan seeking better returns abroad.

However, markets are increasingly doubtful that policy stance can last and yields on Japan’s government bonds maturing in September 2031 rose as much as 2.5 basis points (bps) to a high of 0.295%, according to Tradeweb Markets, and was last at 0.283%.

The yield on 10-year bonds remained at 0.25%, the upper limit of the BOJ policy band.

JGB 10-year yields edge higher as investors brace for Jackson Hole

Ten year US Treasury yields, by contrast, hit an 11-year high of 3.6% overnight as investors braced for a third consecutive 75 basis point Federal Reserve rate hike on Wednesday.

The divergence has been driving Japan’s currency lower and lower this year and speculators have assailed the Japanese bond market in a wager that the central bank will eventually give up on the vast bond buying project that keeps yields pinned down.

“If the Bank of Japan had abandoned its support to keep the yields low, the 10-year yields could skyrocket above 0.3% easily,” said a market participant at a domestic asset manager. So far the BOJ has been steadfast and on Tuesday poured some 836 billion yen ($5.81 billion) into bond purchases to hold the ceiling of 0.25% on the 10-year yield.

But pressure is being felt along the curve and is evident in the central bank’s tempo of purchase offers. On top of a standing offer to buy unlimited amounts of 10-year bonds daily, The BOJ said earlier on Wednesday it would conduct unscheduled bond buying.

The yield on bonds with nine years to maturity are above the target as they fall just outside the BOJ’s primary target window and traders say bonds soon to roll out of the target tenor are crowded with short positions.

Ten-year JGB futures, another popular vehicle for short sellers, hit an almost three-month low on Wednesday. The 20-year JGB yield rose to as high as 0.980%, its highest since January 2016, before falling to 0.970%.

The five-year yield rose 1.5 basis points to 0.065%, its highest since June.

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