TOKYO: Short-term Japanese government bond yields rose on Thursday while those on longer-dated debt eased, flattening the yield curve amid speculation that the Bank of Japan (BOJ) could tighten monetary policy at its meeting next week.

The two-year JGB yield rose 2.5 basis points (bps) to 0.39% as of 0542 GMT, and earlier reached 0.395% for the first time since June 3.

The 30-year yield, meanwhile, fell 4 bps to 2.155%.

Reuters reported on Wednesday that the BOJ is likely to debate whether to raise interest rates at its July 30-31 gathering, and could also reduce its monthly bond purchases by about half.

The BOJ raised rates for the first time since 2007 in March, but has refrained from further hikes so far.

Several high-profile Japanese politicians in recent days have urged a normalisation of monetary policy, including Prime Minister Fumio Kishida.

JGB yields climb as BOJ meet, weak auction spur caution

The other two - Toshimitsu Motegi, secretary-general of the ruling Liberal Democratic Party (LDP), and Digital Transformation Minister Taro Kono - are rivals to Kishida in September’s LDP leadership race.

“There is a belief that the BOJ might hike this month,” said Shoki Omori, chief Japan desk strategist at Mizuho Securities.

“Although they didn’t specify July, Kishida, Kono and Motegi, they all hinted at the need to hike rates in the near term.”

However, Omori thinks the BOJ will forgo higher borrowing costs this time, with a slowing U.S. economy already set to have a knock-on effect on Japan’s growth.

“Fundamentals in Japan are just too weak to support a rate hike now,” he said.

The five-year JGB yield rose 1.5 bps to 0.630%, while the 10-year yield fell 0.5 bp to 1.065% and the 20-year yield lost 1 bp to 1.850%.

Benchmark 10-year JGB futures declined 0.05 yen to 142.75 yen.