(Bloomberg) -- Investors have boosted bets for an interest-rate hike by the Bank of Japan by July following an unexpected reduction in its bond buying during a regular operation this week.

Overnight indexed swaps suggest about a 70% likelihood that the central bank will raise its benchmark rate by then, up from around 50% earlier this month. 

The shift in market positioning comes amid downward pressure on the yen, which is being driven by the wide gap between low interest rates in Japan and much higher borrowing costs in the US. There are also increasing expectations that a BOJ rate hike in July may be preceded by an announcement at its June meeting of a broader cut to bond buying. 

The yen was steady in Tokyo on Wednesday while moves in Japanese bonds were muted, with yields on 20-year and 30-year debt having recently climbed to the highest in a decade. The benchmark 10-year yield was within striking distance of of 0.975%, the highest since 2013.  

Christopher Willcox, the head of Nomura Holdings Inc.’s trading unit, said in an interview Wednesday that the 10-year yield “can possibly get to exceed 1% at some point” because inflation will likely remain elevated.

“Undoubtedly, these markets are going to be more interesting,” he said. 

Willcox added that the yen could still strengthen to as much as 140 to the dollar this year, with the expectation of the BOJ announcing “limited tightening,” possibly in October. The currency traded around 156.38 at 1 p.m. in Tokyo.

Read more: Nomura’s Willcox Says Hedge Funds Are Hunting for Japan Traders 

Investors are divided on the outlook beyond July.

One market gauge suggests that traders are only expecting about one further hike this year on top of the BOJ’s move made in March.

Yet Pacific Investment Management Co. sees the prospect of three more moves this year. Vanguard Group Inc.’s head of international rates Ales Koutny expects hikes to around 0.75% by the end of the year. Goldman Sachs Group Inc. sees the BOJ lifting rates twice a year until they reach 1.25% to 1.5%. 

Some investors think the BOJ won’t sharply increase interest rates because companies that are used to super-low borrowing costs would cut back spending. Others regard neglecting rate hikes as likely to cause the yen to weaken even more, which would inflate import costs.

If the BOJ raises interest rates twice a year, the yield on medium-term bonds and especially five-year notes will be affected, said Tadashi Matsukawa, head of PineBridge Investments Japan Co.’s fixed income management department in Tokyo. 

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