(Bloomberg) -- Japanese government bond yields and bank stocks jumped Wednesday as investors decided that monetary policymakers are on track to scrap negative interest rates in the near term after all.

As traders increased bets that the Bank of Japan will push ahead in the next few months with its first rate hike since 2007, 10-year note yields climbed as much as 10.5 basis points. Shares of Japanese banks, who have struggled through decades of deflation, rose on expectations higher interest rates will improve their lending margins.

A rate increase by the BOJ will be another sign that the world’s third-biggest economy is coming out of an extended period of sluggish demand since an asset-price bubble burst in the early 1990’s, that ultimately prompted the bank to unleash radical stimulus measures.

The timing and extent of expected Federal Reserve rate cuts this year have dominated markets in recent weeks with less attention paid to Japan’s central bank. That left economists looking more bullish over the BOJ’s looming move than market players.

BOJ Governor Kazuo Ueda’s comments on Tuesday convinced many investors that after years of monumental stimulus measures, the central bank is within months of ending its subzero rate. Ueda said the certainty of achieving the bank’s price projections is gradually increasing, a necessary precondition for the BOJ to tweak its policy.

“It is clear that hawkishness has increased and that there has been considerable progress in preparing for ending the negative rate policy,” said Akio Kato, senior manager of the strategic research and investment division at Mitsubishi UFJ Asset Management Co. in Tokyo. “The 10-year yield is likely to rise to about 1% as early as February.”

The hawkish signals from the BOJ included Ueda’s remark that the board has confirmed that the economy is progressing in line with the previous inflation outlook, according to economists from Morgan Stanley MUFG Securities Co. They also highlighted comments that the powerful quake that hit Japan on Jan. 1 hasn’t had significant negative economic impact and the so-called second force of inflation from rising wages is increasing slowly.

Speaking after the policy decision, Ueda also said any rate increase would initially aim to leave BOJ policy supportive of the economy and avoid causing too much disturbance. His remarks supported the prevailing view among economists that the BOJ will raise rates at some point in the first part of this year, with meetings slated for March, April, June and July. The question is when.

Swap markets are pricing in a 73% chance of a 10-basis-point rate increase in April, compared with 44% at the end of last week. The case is building for the BOJ to increase interest rates at its April meeting, as investors tighten their focus on the outcome of spring wage negotiations, according to strategists.

In the equity market, Japanese banks including Mitsubishi UFJ Financial Group Inc. advanced. The Topix bank index jumped 4.2% on Wednesday, the most since September last year, on a day when the broad Topix fell 0.5%. 

Japan’s benchmark 10-year yield biefly touched 0.74%, the highest in more than a month. Longer-dated bonds also dropped, sending 20- and 30-year yields up more than 10 basis points at one point. Japanese life insurers including Japan Post Insurance Co. and Meiji Yasuda Life Insurance Co. said earlier this month they will buy longer debt when yields rise.

Morgan Stanley MUFG Securities economists Takeshi Yamaguchi and Masayuki Inui now predict an end of the negative rate policy in March after more hawkish signs emerged from the BOJ’s outlook report and Ueda’s news conference.

The yen drew support from higher local yields and growing rate-hike bets, rising 0.5% to 147.58 against the dollar as of 5:51 p.m. in Tokyo. Still, the move is relatively muted amid broad dollar strength supported by a resilient US economy, which eases speculation about an early rate cut by the Federal Reserve. 

“There seems to be some room for the yen to rise further in line with increasing yen rates,” said Hiroyuki Machida, director of Japan FX and commodities sales at Australia & New Zealand Banking Group Ltd. “But there’s risk about a further increase in the US yields, putting a break in the pair’s move. An exchange rate in the 147s looks quite right for now.”

--With assistance from Paul Jackson and Daisuke Sakai.

(Adds chart on Japanese shares. An earlier version of this story was corrected to say swaps are pricing in a rate hike of 10 basis points.)

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