It's a conundrum: The Bank of Japan (BOJ) is widely expected to ease policy further at its next meeting later this month, but the country's longer-end bond yields have climbed to six-month highs.
Japan's benchmark 10-year government bond yield climbed to as high as negative 0.003 percent on Monday, just shy of positive territory, which it hasn't seen since mid-March, before retreating to around negative 0.016 later in the afternoon. The 30-year bond was yielding around 0.52 percent late Monday afternoon local time, up from as little as 0.044 percent in late July.
That's a stark reversal from the steady descent into negative territory for long-term bond yields since the BOJ surprised markets in late January by introducing a negative interest rate policy, cutting its rate to negative 0.1 percent. Bond yields move inversely to prices.
But the long-end bonds' rising yields are also somewhat perplexing, given that the central bank was widely expected to provide additional easing later this month as it struggles to spur inflation toward its long-delayed 2 percent target in the long-moribund economy.
The BOJ already owns around 35 percent of the total Japan government bond market as part of its quantitative easing program; its policy is to purchase assets so that its monetary base increases at an annual pace of 80 trillion yen (around $770 billion). That should have kept bond yields suppressed.
Nizam Idris, head of strategy for fixed income and currencies at Macquarie, said the rising bond yields were likely due to the BOJ's plan for a comprehensive review at its next meeting of how well its policy has worked.
"The BOJ has set up the market to expect some kind of action, simply because they said there'll be a comprehensive review," he told CNBC's "Capital Connection" on Monday.
"The main focus here is how do you institute more easing without getting that negative reaction from the market," Idris said, noting that cutting interest rates into negative territory had counter-intuitively resulted in a stronger yen, a drag for many Japanese companies.
He said that the market likely views Japan's flat government-bond yield curve combined with negative rates as hurting the banks, with the likely unintended consequence that the banks won't lend. The flat yield curve would mean that banks borrowing in the short-term market to extend longer-term loans wouldn't be compensated for the risk.
Idris said that's where he expects the BOJ to focus after its policy review.
"My guess is that they will cut interest rates deeper into negative territory and then move away from buying long end bonds to the shorter end bonds, just to steepen that curve a little bit more. To ease the pain on banks," he said.
Others also pointed to expectations the BOJ would change which bonds it buys.
"I think the Bank of Japan does want to run a policy that is positive for the Japanese banking system," said Jesper Koll, CEO of Wisdom Tree Japan, which is an exchange-traded fund (ETF) sponsor and asset manager.
That means the BOJ will want a steeper yield curve, he said.
"Nudging the market in that direction by changing the duration of [the bonds in its] buying program is certainly a possibility," he said.
It wasn't clear whether the rise in yields would last. In a note last week, Deutsche Bank advised using the yield rise as a "good buying opportunity," expecting there would be a need to hedge against a sharp rally in Japan government bond prices after the BOJ meeting. The bank said it expected the BOJ would remain on hold at the September meeting, but that if it acted, it was more likely to turn to accelerated quantitative easing, potentially replacing its 80 trillion yen target with a 70-90 trillion yen range, with a bias toward the band's upper end. That would give the BOJ more control over longer-term Japan government bond yields by ramping up and cutting back purchases as needed, it said.
But some pointed to the possibility the rise in yields might have sticking power.
Wisdom Tree Japan's Koll said he believes there is another, potentially controversial reason that Japan government bond yields might be rising.
"The Japanese economy is recovering," he said. "The negativity on the Japanese economy has gone too far and the empirical evidence suggest that the tightness in the labor market is beginning to feed into rising domestic activity."
That means the risk that Japan government bond yields would rise has become higher than the risk that they would fall further, he said.
Deutsche Bank noted in a separate report last week that in the four months to July, the labor force rose by a cumulative 790,000, pushing the unemployment rate down to 3 percent; with Japan's labor force at around 66 million, that rate of increase wasn't sustainable, the bank noted.
But Koll's view of a nascent recovery may not be the consensus.
Data released last month showed that in the April-to-June period, Japan's economy failed to grow from the previous quarter, missing forecasts for 0.2 percent growth. At the same time, July exports tumbled 14 percent on-year while imports collapsed 24.7 percent, data showed last month.
Analysts have pointed to mediocre data as evidence that Abenomics, the economic plan introduced by Prime Minister Shinzo Abe in 2013 to break Japan's economy out of a decades-long deflationary spiral, has had only very limited success.
The program, which was expected to include three "arrows," began with a first arrow of massive quantitative easing from the BOJ. It was followed by plans for increased government spending. But the third arrow of structural reforms, including immigration and labor changes, has disappointed expectations.
But some economists have raised their forecasts for Japan.
Last month, ratings agency Moody's said it expected Japan's economy to grow 0.7 percent and 0.9 percent in 2016 and 2017 respectively, up from its previous estimate of 0.4 percent for both years, citing plans for fiscal stimulus as well as expectations the BOJ would ease policy further.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1