Japanese Bonds Tumble as Yields Hit Record Highs

Quick overview

The sell-off in Japanese government debt accelerated after investors reacted negatively to the government’s fiscal proposal, amid growing unease over its potential spillover effects on global markets.

Japan’s bond market came under renewed pressure on Tuesday. Sovereign bonds extended their slump, pushing yields to levels not seen in more than three decades, as investors rejected Prime Minister Sanae Takaichi’s campaign proposal to cut taxes on food without a clearly identified funding source.

According to Bloomberg, the yield on Japan’s 40-year government bond climbed above 4%, a record high since its launch in 2007 and the highest level for any maturity of Japanese sovereign debt since the early 1990s. Yields on 30- and 40-year bonds jumped more than 25 basis points on the day—the sharpest rise since April last year, when former U.S. president Donald Trump’s tariff offensive rattled global markets.

Fiscal Concerns and Market Distrust

The sell-off was reinforced by a weak auction of 20-year bonds, which once again highlighted investor concerns over public spending and inflation. At the same time, the wave of selling in Japanese debt spilled over into global markets, amplifying declines in U.S. Treasuries, which were already under pressure amid fears that new tariffs could undermine the appeal of U.S. assets.

Since Takaichi took office in October, yields on 20- and 40-year bonds have risen by roughly 80 basis points, as investors closely monitor Japan’s potential impact on global markets in an environment of heightened volatility ahead of the snap election scheduled for February 8. With no clear funding source for the proposed consumption tax cut, markets expect it to be financed through additional debt issuance.

“The bond market is the canary in the coal mine,” one investor noted. “Despite the reaction, there has been no official communication to counter it. From an investor’s perspective, it’s hard to find incentives to buy bonds.”

Regime Shift and Global Implications

The surge in yields underscores a structural shift in Japan’s bond market after years of ultra-low rates. The 30-year Japanese government bond now yields more than its German counterpart, which is trading around 3.5%. For some asset managers, however, these levels are beginning to look attractive.

“A 40-year bond yielding above 4% offers increasing value for long-term investors, especially on a currency-hedged basis,” some managers argue.

Rising yields have also drawn in foreign capital, which now accounts for nearly 65% of monthly trading volume in Japan’s bond market. At the same time, the yen weakened to 158.60 per dollar, while Japanese equities moved in line with broader declines across Asian markets.

Risk of Bank of Japan Intervention

Negative sentiment deepened after data showed that domestic insurers sold a record amount of ultra-long bonds in December—the largest net liquidation since records began in 2004. Although Japan’s debt-to-GDP ratio has fallen to a 16-year low, it remains the highest among advanced economies, making demand particularly sensitive to any signs of increased borrowing.

Against this backdrop, some market participants warn that if pressure persists, the Bank of Japan may be forced to step in to stabilize the market. Should the sell-off intensify and spread globally, the central bank could revive its unlimited bond-buying tools to stem the decline.

ABOUT THE AUTHOR See More

Ignacio Teson

Economist and Financial Analyst

Ignacio Teson is an Economist and Financial Analyst. He has more than 7 years of experience in emerging markets. He worked as an analyst and market operator at brokerage firms in Argentina and Spain.

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