Japan bond meltdown sends yields to record high on fiscal fears

TOKYO – The slump in Japanese bonds deepened on Jan 20, sending yields soaring to records as investors gave a thumbs down to Prime Minister Sanae Takaichi’s

election pitch to cut taxes on food

.

The 40-year rate rocketed through 4 per cent to the highest since its debut in 2007, in a first for any maturity of the nation’s sovereign debt in more than three decades. The jump in 30- and 40-year yields of more than 25 basis points was the most since the aftermath of US President Donald Trump’s

Liberation Day tariffs onslaught

in April 2025.

A lacklustre auction of the 20-year tenor earlier underscored broader worries over government spending and inflation.

The action in Tokyo also rippled into Treasuries trading in Asia, with 30-year US yields up around 7 basis points. 

Since Ms Takaichi

took office in October

, the 20- and 40-year yields have risen about 80 basis points. Investors are on guard for moves in Japan spilling over into global markets amid the prospect of continued volatility in Tokyo trading ahead of the snap poll Ms Takaichi is scheduling for Feb 8.

“There is no clear funding source for the consumption tax cut, and markets expect it to be financed through government bond issuance,” said Ms Yuuki Fukumoto, senior financial researcher at NLI Research Institute.

“The bond market is effectively the canary in the coal mine, and despite the market reaction, there has been no communication from the government to push back. From an investor’s perspective, it’s hard to see a scenario where buying bonds makes sense.”

The surge in yields marks a shift that’s been going on in Japan’s bond market, where years of ultra-low interest rates had kept yields well below those of global peers. The nation’s 30-year bond yield has surpassed Germany’s rate of that tenor, which sits at around 3.5 per cent. Japan’s bonds are quoted using simple yields, while international market conventions typically use compound yields.

“The 40-year yield above 4 per cent – its highest since its 2007 debut and significantly above super-long bunds – offers increasingly attractive value for both domestic and foreign long-term holders, especially on a currency-hedged basis where yield pickup is substantial,” said Ms Masahiko Loo, senior fixed-income strategist at State Street Investment Management. 

The spike in yields has made Japan’s bond market increasingly attractive for foreign investors, who now account for roughly 65 per cent of monthly cash Japanese government bond transactions, according to Japan Securities Dealers Association (JSDA) data.

The Singapore Exchange will introduce futures on longer-dated Japanese government bonds as trading in the world’s third-biggest debt market heats up.

Treasuries also joined the sell-off in global bonds amid concerns about fiscal spending, a fresh geopolitical tariff threat and questions over the impact that might have on demand for American assets.

Australian and New Zealand bonds also fell, while German bund futures declined.

Meanwhile, the yen is hovering around the 158 level against the dollar, while Japan’s stocks slumped alongside broader declines in Asia. 

Bearish bond sentiment got another shove after data from the JSDA showed that local insurers dumped a record 822.4 billion yen (S$6.7 billion) of bonds with original maturities over 10 years in December, the biggest net sale in Bloomberg-compiled records dating back to 2004.

While Ms Takaichi’s strong approval ratings have led some investors to assume an easy victory, the merger between Japan’s largest opposition party and a former ruling coalition partner has increased the riskiness of the Prime Minister’s election gamble. The Centrist Reform Alliance aims to generate the financing needed to cut the sales tax on food to zero through the management of a new government-related fund. BLOOMBERG