While watching the Tokyo bond market on Tuesday afternoon, I was actually quite anxious. When the results of the 10-year Japanese government bond auction came out, I finally breathed a sigh of relief—the bid-to-cover ratio jumped directly to 3.59, and the tail spread was compressed to 0.04, with the yield falling back from that scary high point in 2017 to 1.865%. But to be honest, this feels more like a technical breather than a trend reversal. Eugene Leow from DBS put it quite bluntly: everyone just saw the yield approaching 2% and thought they could catch a bottom, not that they really believe the Japanese economy is going to da moon.

The real highlight is yet to come.

In two weeks, Ueda and his team will most likely take action – the first interest rate hike since 2007. His recent statements are quite interesting, saying something like "slightly easing off the accelerator, not slamming the brakes." The market immediately understood: the rate hike is a certainty, just with a gentle approach. The problem is, gentle or not, once the direction changes, the entire rules of the game have to be rewritten.

The more tricky part is that Sato Mai from the Takashima side is also throwing out a stimulus plan of 21 trillion yen at the same time. Just think about it, on one hand tightening monetary policy while on the other hand massively expanding fiscal policy, these two forces intertwined, can the bond market not tremble? The world's third largest bond market is now being repriced, and both Wall Street and Silicon Valley are already feeling the liquidity valve slowly tightening.

The auction on Tuesday merely stabilized the situation temporarily, with bears taking a step back for the moment. But to be blunt, the Japanese bond market is entering a new normal—a combination of interest rate hikes and fiscal expansion. The upcoming volatility may have just begun. This structural transformation cannot be fundamentally blocked by technical corrections.