Japan’s long bonds rebound after Tokyo calls for market calm

TOKYO – Japan’s longer maturity bonds rebounded after Finance Minister Satsuki Katayama called for calm among market participants following a rout that pushed yields to all-time highs.

Yields declined for so-called super-long debt on Jan 21, with that on the 40-year tenor falling back 22 basis points after jumping more than 25 basis points (quarter percentage point) on Jan 21.

With a snap election in Japan coming on Feb 8, investors are worried there will be more volatility ahead.

Japan’s US$7.5 trillion (S$9.6 trillion) bond market has for decades been considered one of the most stable.

Japanese bonds used to have such low yields that they acted as a kind of anchor for the global debt market, adding downward pressure on government borrowing costs the world over. 

But recent demand for them has plunged, which has caused the price of bonds to fall, and yields to inversely rise. 

The latest plunge in demand was triggered by Prime Minister Sanae Takaichi’s election pitch to cut taxes, and sent ripples across global markets, with US Treasury Secretary Scott Bessent saying he had spoken with his Japanese counterpart and that the moves had impacted Treasuries.

“Katayama’s comments will have some impact on the market, but these are not the type of moves that can be stopped with just verbal intervention,” said Sumitomo Mitsui Trust Asset Management senior strategist Katsutoshi Inadome. “Bonds will likely be bought today, but the upside momentum is likely to gradually fade.”

The yield on the 30-year bond fell 7.5 basis points to 3.8 per cent. Even with the rebound, the 40-year bond is still yielding more than 4 per cent, after rocketing on Jan 20 to as high as 4.215 per cent for the first time ever.

“The bond market rebounded, but the move lacked strong momentum,” said Mitsubishi UFJ Morgan Stanley Securities fixed-income strategist Kazuya Fujiwara. “Unless uncertainty surrounding fiscal policy clearly improves, it will be difficult to find catalysts for buying.”

Japan’s second-biggest bank said that it plans to aggressively rebuild its local sovereign debt holdings once the surge in yields runs its course. 

Investors are also worried about further weakness in the yen if the Bank of Japan (BOJ) intervenes in the bond market.

“Many market participants expect the BOJ to make extraordinary purchases of government bonds, but this will depend on whether the government tolerates the resulting yen depreciation,” said AXA Investment Managers senior fixed-income strategist Ryutaro Kimura. 

“If the BOJ were to intervene aggressively in the market to push down interest rates, the dollar-yen exchange rate would likely at least break through the government’s defence line of 160 yen to the dollar,” Mr Kimura added, referring to a key psychological level for the Japanese currency.

Many major markets around the world have been experiencing a rout in longer-dated bonds since US President Donald Trump unveiled his “Liberation Day” tariffs in April, which have heightened inflation risks and, in turn, pushed yields higher.

Mr Trump’s latest push to take over Greenland has also caused the price of US Treasuries to tumble.

Adding to the upward pressure on yields, traders are also increasingly betting that some central banks will slow or halt their monetary easing in 2026, further dampening demand for bonds beyond Japan. BLOOMBERG