Japan’s benchmark government bond yield climbed to the highest since 2013 amid expectations that the central bank is committed to normalizing interest rates and supporting the struggling yen.

The yield on 10-year government debt rose 2.5 basis points to 0.975% on Monday, a level last seen when the then newly appointed Bank of Japan Gov. Haruhiko Kuroda was starting his radical monetary easing.

Now under his successor Kazuo Ueda, the yield is edging toward the closely watched 1% mark, a far cry from the deeply negative levels seen as recently as 2020.

Yields on debt due in 20 years to 30 years have also climbed to decade highs, raising expectations that Japanese investors will put more of their funds into domestic debt rather than markets in the United States and Europe.

"The 10-year yield has risen gradually on the back of the view that the BOJ will lift interest rates sooner and cut bond-purchase amounts at its operations,” said Naoya Hasegawa, chief bond strategist at Okasan Securities in Tokyo.

There may be a little more buying interest for this maturity around the 1% level but selling pressure at the long end of the yield curve is set to continue, according to Hasegawa.

Investors are scouring data and policymaker statements to try to predict the BOJ’s next move.

Pacific Investment Management sees the prospect of three more moves this year. Vanguard Group’s head of international rates Ales Koutny expects hikes to around 0.75% by the end of the year.

In contrast to the views of Pimco and Vanguard, AllianceBernstein Holding said last week that the BOJ is likely to favor reducing its vast balance sheet over increasing interest rates.

This matters for the currency market because the huge gap in yields between Japan and the rest of the world has driven the yen to a 34-year low against the dollar.

Even as Japan’s 10-year yield has risen, its U.S. counterpart is still about 3.4 percentage points higher.

The yen was down 0.1% versus the dollar at ¥155.73 as of 1:05 p.m. in Tokyo.

Ueda told Prime Minister Fumio Kishida earlier this month that he’s watching the yen’s the impact on prices.

He’s said in parliament that "a monetary policy response might be needed.”

Shoki Omori, chief desk strategist at Mizuho Securities in Tokyo said, "Touching 1%, or even going above 1%, is a matter of time unless U.S. data comes out weak and U.S. rates goes lower with speed.”

Japan’s inflation has been above the central bank’s target of 2% every month since April 2022.

Reflecting this, an auction of 10-year inflation-indexed bonds saw the highest bid-to-cover ratio since August 2007 on Monday.

Meanwhile, the market for overnight indexed swaps is pricing about a 57% chance that the BOJ will lift rates by July, compared with around 50% odds at the start of May.

Goldman Sachs Group strategists now predict Japan’s 10-year sovereign yield to rise to 2% by the end of 2026 on expectations the central bank will deliver a "prolonged” tightening cycle.

They expect the BOJ to raise interest rates to 1.25%-1.50% by 2027, according to a note dated Friday from George Cole and Bill Zu.

"We think this rise in nominal yields will be led by rising inflation expectations and real rates will be relatively contained,” they wrote.

Still, "real rates in Japan are unlikely to fall from current levels given the likelihood of hikes in response to higher inflationary pressure from here.”