Rising oil prices have rekindled inflation worries and pushed Japanese
government bond yields higher. The five-year JGB yield hit a record high and the
two-year yield rose to its strongest level since May 1995, prompting markets to
increase bets on further BOJ tightening; Tokyo traders' association data place
the probability of a September BOJ rate hike at roughly two-thirds. Domestic
yield moves have not produced clear yen support: strategists say external forces
— higher U.S. Treasury yields, firmer oil and a strong dollar/yen — remain the
dominant drivers. Higher JGB yields could eventually help the yen by narrowing
the Japan-U.S. yield gap, but current external pressure outweighs that effect.
Wednesday's U.S. CPI print is the key near-term catalyst for the dollar and
global yields.
