Most “markets see a 70% chance of a Bank of Japan hike” headlines trace back to one instrument and, at their core, to one division problem: the meeting-dated overnight index swap (OIS) on TONA, Japan’s overnight benchmark rate. Take the swap rate covering the period just after a policy meeting, subtract the current policy rate, divide by the assumed hike size of 25 basis points, and you have a first approximation of the implied probability. Once you can run that arithmetic yourself, you can also see why a hike that is “fully priced in” often lands on the stock market with a shrug while a surprise of the same size can move indices for days.
The topic is timely as we write: in early September 2026, the BoJ’s next scheduled policy meeting is approaching, and financial media are once again publishing swap-implied odds for it. We will not lean on any particular reading here — those numbers move daily and should be checked directly at the sources listed at the end. This guide is not about that meeting. It is about the machinery that will produce the same headlines before every meeting after it.
The instrument behind the headline: TONA overnight index swaps
TONA (Tokyo Overnight Average Rate, the mujintanpo call rate or uncollateralized overnight call rate average) is the interest rate at which Japanese banks lend to each other overnight. It is published daily by the Bank of Japan and sits almost exactly on top of the BoJ’s policy rate, because the policy rate is precisely the rate the central bank steers the overnight market toward.
An overnight index swap is a contract in which one party pays a fixed rate for a set period and receives the compounded average of TONA over that same period. No principal changes hands; only the difference is settled. The fixed rate that makes the contract fair at inception is therefore the market’s best estimate of the average overnight rate over the life of the swap. That property is what makes OIS the cleanest window into policy expectations:
- Its credit risk is generally limited: with no principal exchanged, counterparty exposure is confined to the swap’s mark-to-market replacement value, and in practice it is often mitigated by collateral and central clearing. As a result the rate is far less contaminated by bank funding stress than old interbank benchmarks were.
- Short-dated OIS carries very little term premium, so nearly all of the rate reflects the expected path of the policy rate.
- Dealers quote swaps whose start and end dates bracket individual BoJ meetings — so-called meeting-dated swaps — which isolates the expectation for one specific decision.
From swap rate to probability: the arithmetic
Suppose the policy rate is 1.00% and the question is whether the BoJ hikes by 25bp at the next meeting. A meeting-dated swap covering the weeks immediately after that meeting can only average two outcomes: TONA stays near 1.00% (no hike) or moves to near 1.25% (hike). The quoted swap rate is the probability-weighted blend, so:
Implied probability = (meeting-dated OIS rate − current policy rate) ÷ assumed hike size
An illustration with round numbers: if the post-meeting swap is quoted at 1.175%, the calculation is (1.175 − 1.000) ÷ 0.25 = 0.70, i.e. a 70% implied probability. At 1.25% the hike is “fully priced”; at 1.00% nothing is priced.
Be clear about what this is: a deliberately simplified, binary approximation, not the full calculation behind every published figure. A defensible professional estimate works from the relevant forward or meeting-dated OIS structure, accounts for the expected basis between TONA and the policy rate, weights the days on each side of the decision date, handles the compounding convention correctly, and adjusts for risk premia. Simply subtracting the current policy rate from whatever post-meeting swap quote you can find can misstate the probability. The division above is the skeleton inside the headline numbers, not the whole body.
Three further caveats keep the number honest:
- The hike size is an assumption. The formula above assumes the only choices are 0bp and 25bp. If the market assigns any weight to a 50bp move or to a cut, the same swap rate maps to a different probability. In the post-2024 normalization era the BoJ has moved in 25bp-style steps, so the assumption is usually reasonable — but it is an assumption, not a fact.
- It is a market price, not a forecast. The number embeds hedging demand and risk premia. A 70% reading means insuring against a hike costs what a 70% probability would justify — which is close to, but not identical to, the market’s true expectation.
- Meeting probability and path are different questions. A market can price one meeting at 90% and still price only two hikes over the following year. Always ask which the headline is describing.
A worked example from real data: reading the 2-year JGB
Retail readers rarely see raw OIS screens, which sit on institutional terminals. The most accessible public proxy is the short end of the Japanese government bond (JGB) curve, published daily by the Ministry of Finance. Here is an actual reading, step by step:
| Input | Value | Source / date |
|---|---|---|
| 2-year JGB yield | 1.848% | MOF, close of 2026-09-08 |
| BoJ policy rate | current level from the BoJ website | Bank of Japan, updated after each meeting |
| Gap | yield minus policy rate | your arithmetic |
How to read it: a 2-year JGB pays roughly the average expected overnight rate over the next two years, plus a term premium and a technical basis between bonds and swaps. If the yield sits meaningfully above the current policy rate, the market expects the policy rate to average higher over that window — in other words, further tightening is priced on average. Treat this strictly as a rough path signal: it cannot separate one meeting from another, it cannot tell you how many hikes of what size on what schedule, and part of any gap reflects term premium and the bond/OIS basis rather than pure expectation. For meeting-by-meeting precision you still need the OIS-derived figures reported by financial media — but the 2-year JGB is the free, daily, official sanity check on whether those headlines are plausible.
Why a fully priced hike barely moves stocks — and a surprise does
Asset prices are forward-looking, so today’s Nikkei level already contains the market’s probability-weighted view of the next decision. When the BoJ delivers exactly what was priced, no new information arrives and there is, mechanically, nothing to reprice. What moves markets is the surprise component: the gap between the outcome and what was priced.
- Hike priced at 100%, hike delivered: the decision itself is a non-event. Attention shifts entirely to the statement, the Governor’s press conference, and any guidance about the pace of future hikes — which is where the actual volatility comes from.
- Hike priced at 100%, no hike delivered: this is a large easing surprise. Short-end yields fall, the yen typically weakens, and rate-sensitive equities reprice sharply.
- Hike priced at 30%, hike delivered: a 70%-sized tightening surprise. Bank stocks (which benefit from wider lending margins) tend to outperform, while long-duration growth names and leveraged balance sheets tend to lag; the yen tends to firm, pressuring exporter earnings assumptions.
This is why “the BoJ hiked and stocks rose” headlines confuse newcomers. The reaction was never to the hike; it was to the hike relative to pricing, plus whatever the guidance implied about the meetings after it. It is also why implied volatility can rise into meetings even when the decision looks certain: as of 2026-09-08, with the next scheduled decision approaching, the Nikkei Volatility Index stood at 32.05, in the 87th percentile of its prior 901 sessions. An elevated reading into a decision window typically reflects hedging of the statement and press conference, not just the rate move itself.
Where to check the numbers before each meeting
The BoJ holds eight scheduled Monetary Policy Meetings per year, with dates published well in advance. A practical pre-meeting checklist for readers without a terminal:
- BoJ website: the meeting calendar, the current policy rate, daily TONA fixings, and — after each meeting — the statement and Summary of Opinions that shape pricing for the next one.
- MOF JGB yields: published every business day. Watch the 2-year yield’s gap over the policy rate as your path gauge, and its day-to-day moves around data releases as your repricing gauge. (For scale: on 2026-09-08 the 2-year moved just 0.4bp on the day — a quiet session — while a genuine repricing typically shows up as a move of several basis points at the short end.)
- Financial media OIS trackers: major wires publish swap-implied meeting probabilities in the run-up to each decision. Now that you know the formula, read these critically — check what hike size they assume.
- JPX: for the equity-side reaction function — sector indices (banks versus growth), index options activity around meeting dates, and derivatives statistics.
Common mistakes to avoid
- Treating 70% as a forecast that “should” come true. A 70% pricing that resolves to no hike is not proof the market was wrong; three times out of ten that is the expected outcome.
- Reading a fully priced meeting as a risk-free one. The decision may be certain while the guidance is not. Positioning and volatility data routinely show heavy hedging into “certain” meetings.
- Using long JGB yields as a policy probability. The 10-year and beyond are dominated by term premium, supply, and global yields. Stay at the 2-year or shorter for policy signal.
- Ignoring the denominator. If the market starts entertaining 50bp moves, a swap rate that previously meant “100% of 25bp” suddenly means “50% of 50bp.” Probability headlines can jump without any swap actually trading differently.
FAQ
Is OIS-implied probability the same as a fed funds futures probability?
Same logic, different instrument. The US convention uses exchange-traded fed funds futures; Japan’s overnight market is expressed mainly through dealer-quoted TONA swaps. Both extract a probability by comparing a market rate for the post-meeting period against the current policy rate and dividing by an assumed increment.
Can retail investors trade TONA OIS directly?
Practically, no — these are institutional over-the-counter contracts. Retail investors express rate views indirectly: JGB futures and bond ETFs, bank-sector versus growth-sector equity exposure, or currency positions. The OIS market is best used as an information source, not a venue.
If a hike is fully priced, why does the yen still move on the announcement?
Because the currency prices the entire expected path, not one meeting. A delivered hike accompanied by cautious guidance can weaken the yen (the future path gets repriced down) even as the meeting itself matched expectations exactly.
How early do markets start pricing a meeting?
Continuously — dealers may quote meeting-dated structures around several forthcoming meetings, though availability and liquidity are not guaranteed at all times. Pricing typically firms after major data (wages, CPI, the BoJ’s Tankan survey) and after BoJ speeches, then stabilizes in the final days when the bank enters its pre-meeting blackout period.
Sources
- Bank of Japan — policy rate, TONA data, meeting calendar and statements: www.boj.or.jp/en
- Ministry of Finance Japan — daily JGB yield curve: www.mof.go.jp/english
- JPX — equity and derivatives statistics: www.jpx.co.jp/english
- Nikkei Indexes — Nikkei 225 and Nikkei Volatility Index: indexes.nikkei.co.jp/en
Disclaimer: This is an information and analysis publication, not investment advice. See our Methodology for data sources, standards, and our corrections policy.