Japanese government bonds (JGBs) saw a sharp sell-off, pushing long-term yields to their highest levels in decades amid concerns over Japan’s fiscal position and a weakening yen, which has slipped to a 10-month low. As bond prices and yields move inversely, the decline in prices has sent yields on longer-tenor JGBs to record or multi-year highs.
The 30-year JGB yield rose 5 basis points (bps) to an unprecedented 3.39%, while the 20-year yield climbed 3.5 bps to 2.85%, its highest level since June 1999. The benchmark 10-year yield hit 1.835%, a level last seen in June 2008. Shorter maturities also moved higher: the two-year yield rose 3.5 bps to 0.96%, and the five-year yield increased 4.5 bps to 1.305%, both their highest levels since 2008.
The sharp move in bond yields prompted the Bank of Japan (BoJ) to signal its readiness to act. BoJ Board member Junko Koeda said the central bank stands ready to intervene in the bond market if yields rise sharply under exceptional circumstances, Reuters reported.
At the same time, Japanese yen weakened to 157.48 per dollar, its lowest level since January 15, and hovered near a record low against the euro.
The sharp rise in Japanese bond yields have unsettled global financial markets as investors fear potential capital shifts. Japanese institutional investors are among the largest holders of foreign bonds, equities and alternative assets, so changes in domestic yields can have global implications.
Why are Japanese bond yields rising?
Several factors have contributed to the rise in Japanese bond yields. This includes a combination of persistent rise in inflation, monetary policy normalization by the Bank of Japan, expectations of future interest rate hikes, and growing investor concern over Japan’s massive fiscal debt.
According to a Reuters report, the government is finalising a spending package worth 21.3 trillion yen ($135.38 billion), significantly larger than last year’s 13.9 trillion yen stimulus. This underscores Prime Minister Sanae Takaichi’s expansionary fiscal and monetary approach and adds to worries about long-term fiscal sustainability.
A weaker yen has also boosted expectations of an earlier rate hike by the BoJ, further supporting higher bond yields.
Kruti Chheta, Fund Manager & Fixed Income Analyst, Mirae Asset Investment Managers (India) noted that the volatility in Japan’s bond market this year has largely been driven by its own policy stance.
“In the post-Covid period, while global central banks raised rates to combat inflation, Japan maintained ultra-low rates despite high inflation. Coupled with one of the largest fiscal stimulus packages among developed economies, this led to sharp currency depreciation, capital outflows, and eventually forced the Bank of Japan to adjust policy,” said Chheta.
Even now, the interest rate differential with other developed markets remains wide, and Japan’s elevated debt levels make its yields vulnerable to further stress, she added.
How rising JGB yields can impact global markets
Japan is one of the world’s largest creditor nations and plays a key role in global capital flows. Japanese institutional investors hold substantial amounts of foreign bonds, equities and alternative assets. Rising JGB yields can influence global markets in several ways:
Repatriation of capital: As JGB yields become more attractive, Japanese investors may sell foreign assets and bring capital back home. This can put downward pressure on prices and upward pressure on yields in overseas bond markets, including the US, Europe and emerging markets (EMs).
Unwinding of the yen carry trade: For years, investors have borrowed in low-yielding yen to invest in higher-yielding foreign assets. As Japanese yields rise, this “yen carry trade” becomes less profitable, prompting investors to unwind positions.
Risk sentiment and equities: Sectors and markets that benefitted from abundant, low-cost Japanese capital could face selling pressure. A shift in sentiment away from riskier assets due to volatility in Japan can trigger broader corrections across global equity markets.
Impact on India
Rising Japanese bond yields affect India primarily through tighter global liquidity, potential capital outflows, and increased currency volatility, especially in the stock and bond markets.
For India, higher Japanese bond yields matter mainly through global liquidity, capital flows and currency movements. If Japanese investors repatriate funds, global liquidity could tighten, weighing on risk assets, including Indian equities and bonds.
As the yen carry trade unwinds, foreign investors may trim exposure to higher-yielding markets like India and shift allocations back to Japan or other developed markets, increasing volatility in domestic equity and debt markets.
At the same time, an appreciating yen and potential portfolio outflows could put downward pressure on the rupee, leading to higher currency volatility. Rising global bond yields also shape yield expectations in India, pushing up long-term borrowing costs for the government, companies and households.
According to Chheta, the dynamics are different for emerging markets. While developed economies are struggling with high inflation, widening deficits, and slowing growth, many emerging markets including India have strengthened their fundamentals through fiscal consolidation, lower debt ratios, and moderate growth,
“Given these stable macros, rising Japanese yields are unlikely to have a significant impact on India. Moreover, foreign investors hold less than 5% of India’s outstanding debt, providing a natural cushion against global volatility,” Chheta said.
Rising JGB yields are not just a domestic issue for Japan; they have meaningful implications for global financial markets, including emerging economies like India, through changes in capital flows, risk appetite and interest rate expectations.
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