Japan 2-year bond yield rises to nearly 30-year high on rising inflation pressure

By Rocky Swift

TOKYO, March 26 (Reuters) - The yield on Japan's two-year government bond rose to a nearly three-decade high on Thursday, as the protracted Middle East crisis added to inflationary pressures and reinforced the need for accelerated interest rate hikes by the central bank.

The two-year yield JP2YTN=JBTC, which is most sensitive to Bank of Japan rates, rose 1.5 basis points to 1.32%, the highest since May 1996, based on Japan Bond Trading Co. data.

The yield on the five-year Japanese government bond JP5YTN=JBTC added 2 bps to 1.735%.

Yields move inversely to bond prices.

Japan's economy remains highly exposed to spikes in crude oil prices due to its heavy reliance on imported energy. Higher oil costs feed into inflation, eroding the real value of fixed bond payments and adding pressure on the central bank to tighten monetary policy.

A key gauge of Japan's service-sector inflation rose 2.7% in February from a year earlier, data showed on Thursday, reinforcing the BOJ's view that a tight labour market is prompting firms to pass on rising costs to consumers.

Minutes of the BOJ's January meeting released on Wednesday showed many BOJ policymakers saw the need for further rate hikes.

Markets are now pricing in 61% possibility of a 25 bps rate hike to 1.00% at the bank's April meeting, per LSEG data.

The benchmark 10-year JGB yield JP10YTN=JBTC rose 2 bps to 2.270%.

The 20-year JGB yield JP20YTN=JBTC climbed 0.5 bps to 3.110%. The 30-year yield JP30YTN=JBTC was flat at 3.505%. The yield on the 40-year JGB JP40YTN=JBTC, Japan's longest tenor, rose 1 bps to 3.73%.