The underlying factors fueling the significant change in Japanese government bonds?
In a notable development, Japanese government bond (JGB) yields have experienced a significant increase over the past year, marking a departure from the downward trend that has been ongoing for over three decades. This upward trend, while seen as a brief upheaval by some, has not gone unnoticed in the global financial community.
The Bank of Japan (BoJ) announced a reduction in the pace of quantitative easing (QE) in response to this trend, signalling a gradual exit from its decade-plus ultra-accommodative monetary policy. After years of maintaining negative or near-zero interest rates, the BoJ began a hiking cycle in March 2024, raising its policy rate from -0.10% to 0.50% by June 2025.
The recent Upper House elections in Japan may lead to a shift toward greater fiscal accommodation, potentially supporting further increases in mid- to long-dated JGB yields if the government gains more fiscal flexibility.
This change in Japanese bond yields holds significant implications for global markets. Higher JGB yields reduce the incentive for Japanese investors to seek higher yields overseas, potentially altering global capital flows. Rising yields in Japan may also be seen as a signal of rising inflation and fiscal risks that could affect global fixed income markets, contributing to upward pressure on yields globally.
The shift might also impact the "yen carry trade," where investors borrowed cheaply in yen to invest in higher-yielding currencies. Higher JGB yields could reduce profits from this trade, leading to repricing in international bond markets.
Interestingly, the current 30-year JGB yield (~2.9%) is now comparable to the 30-year German bund (~3.1%), showing a convergence between Japanese and global bond yields. This reflects the global trend of tightening monetary policy and inflation concerns.
However, it's important to note that the 30-year JGB and the 30-year bund are now in line, but five-year yields are still well over a percentage point apart. This discrepancy may suggest a more gradual unwinding of the long-term distortion in global markets, which is likely to be bullish for the yen over the long term.
Markets are pricing in a very drawn-out adjustment for Japanese monetary policy. The instinctive doubt that the current upward trend in JGB yields will last is widespread among those conditioned to expect low yields. Yet, the belief that JGB yields will soon head right down again is common among the same group.
It's crucial to remember that the bursting of the bubble occurred just after JGB yields peaked in 1990. Investors are worried about increased government spending, potential for large bond issuance, politics, and other factors that could influence the trajectory of JGB yields.
The term "shorting JGBs" refers to betting on the decline of Japanese government bond yields. Despite the big upward moves in longer-dated JGBs over the past year, these moves have not drawn as much attention as they might have in the past.
In summary, the doubling of Japanese bond yields marks a key monetary policy shift in Japan and holds important implications for global debt markets through changes in capital flows, risk perceptions, and yield benchmarks. As the unwinding of the long-term distortion in global markets gradually unfolds, the yen may become a more attractive currency for investors in the long term.
[1] Reuters, "Japan's 10-year bond yield hits 3-year high on BoJ tightening expectations," 2025. [2] Bloomberg, "Japan's Rising Bond Yields Signal Global Inflation Risks," 2025. [3] Financial Times, "Japan's BoJ raises interest rates for first time in over a decade," 2025. [4] CNBC, "Japan's 30-year bond yield hits 3-decade high amid global bond market rout," 2025.
- Subscribers of a personal finance newsletter may find the current news about the increase in Japanese government bond (JGB) yields and the Bank of Japan's shift in monetary policy relevant for their investing decisions in the global finance market.
- The recent move of the Japanese government to raise JGB yields could potentially impact the "yen carry trade," a common business strategy that involves borrowing yen at low interest rates to invest in higher-yielding currencies, necessitating a reanalysis of this practice by investors.
- The convergence between the 30-year Japanese bond yield and the 30-year German bund indicates a shift in global personal finance, with both yields reflecting tightening monetary policy and inflation concerns, a pattern being observed across several global debt markets.
