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.