Japanese government bond yields rose on Wednesday as crude oil prices climbed on renewed uncertainty over the Middle East, adding to inflation concerns just as investors awaited key US inflation data for further clues on the interest rate outlook.

The benchmark 10-year JGB yield rose 1.5 basis points to 2.820%, while the 5-year yield also rose 1.5 basis points to 2.100%, a record high. The 2-year yield, the tenor most sensitive to Bank of Japan policy rates, increased 2 basis points to 1.63% — its highest level since May 1995. The levels are especially notable given that Japan only exited negative interest rate policy in March and the BOJ raised rates again in July, milestones in the unwinding of a framework that held borrowing costs near or below zero for roughly a decade. Other tenors had yet to trade as of 0019 GMT.

The move higher in yields reflects markets pricing a firmer case for further Bank of Japan tightening as imported inflation risk builds through rising crude prices. The fact that the 2-year is leading the move aligns with Tokyo Tanshi data showing traders now assign roughly a 66% probability to a rate hike at the September meeting as of Monday afternoon, up from prior levels, as the combination of imported energy inflation and a resilient domestic growth picture builds the case for the BOJ to act again before year-end.

The rise in yields came against a backdrop of fresh geopolitical strain. Iran's top security official said on Tuesday that the Strait of Hormuz will remain closed unless the United States accepts Iran's conditions for ending the conflict, namely the release of Iran's frozen assets and an end to wars across the region, including in Lebanon and Gaza. Separately, the United States and Yemen's Iran-aligned Houthis each reported attacks on shipping on Tuesday.

Brent crude futures rose $1.19, or 1.4%, to settle at $88.91 a barrel, while US crude rose 1.3% to $83.20.

Despite the rise in Japanese yields, that support has yet to show up meaningfully in the yen. Keisuke Tsuruta, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities, said external conditions are likely to remain a headwind, pointing to recent rises in US long-term yields, crude oil futures, and the dollar against the yen.

That disconnect underscores a notable dynamic in currency markets. In theory, higher domestic yields should make yen-denominated assets more attractive on a rate differential basis, but for now the external forces Tsuruta describes — a firmer dollar chief among them — continue to dominate. Whether rising Japanese yields eventually translate into yen strength may depend on how much further the BOJ tightening narrative advances relative to the pace of moves in US yields and the dollar.

Wednesday's US Consumer Price Index data could prove decisive for the path of interest rates on both sides of the Pacific, serving as a swing factor for both the dollar leg of the equation and the broader trajectory of global yields.

Earlier, the Reuters Tankan survey, a monthly gauge of Japanese business sentiment modelled on the BOJ's quarterly Tankan, showed its highest manufacturing reading since March, driven by a boom in semiconductors.