JGB yields have climbed to multi-decade geographical peaks, with the 10-year benchmark yielding more than 1.595% on Tuesday, July 15th, 2025, a level not seen since just before Halloween, October 2008.
Japan’s bond yields reach multi-decade highs amid rising fiscal concerns ahead of the upcoming election. Discover the implications for investors and the economy.
The spike in yields, especially on the far end of the curve, is a reflection of growing investor concern over Japan’s fiscal state and the prospects for additional government spending as preparation for the pivotal Upper House election on Sunday, July 20, heightens.
Record Highs and Market Instability
The 30-year JGB yield, a bellwether for long-term fiscal health, surged to an all-time 3.195% on Tuesday, and the 20-year yield rose to 2.65%, its highest since November 1999.
The rapid movement reflects rising strains in a Japanese government bond market that has been unusually stable in the past, anchored by the BoJ’s ultra-accommodative monetary policy. The rapid rise in yields is a troubling one for a country with the largest public debt-to-GDP ratio in the developed world, which comes in at around 250%.
Although the majority of Japan’s debt is held at home, any slackening in appetite from institutional buyers, who fund themselves at a spread over the JGB market, along with the BoJ’s ongoing gradual reduction of bond purchases, is increasing the vulnerability of the market.
Fears About the Economy Before the Election
The approaching race for the Upper House is a big factor behind the bond market sell-off. Japanese Prime Minister Shigeru Ishiba’s ruling Liberal Democratic Party (LDP) and its junior coalition partner Komeito are facing a difficult challenge, with local polls indicating they will struggle to win a majority in the chamber.
The possibility of a weakened ruling coalition or political continuity is stoking fears about continued budget generosity. Opposition parties, riding the wave of platforms that promise to tackle surging living costs, are pushing for steps like consumption tax advisory reductions. Such policies, although popular with voters, would also widen the fiscal deficit, making Japan’s already stretched finances even worse.
“As the volume is building around noise going into more fiscal spending, we took an underweight on Japan in general,” said Ales Koutny, head of international rates at Vanguard, speaking to the UK bond market’s headaches in recent years.
BoJ’s Delicate Balancing Act
The Bank of Japan is in a ticklish situation. Following its unconventional yield curve control (YCC) policy exit and, now, slow interest rate hikes (the cash rate sits at 0.5%), the central bank targets a sustained 2% inflation.
But ramped-up fiscal spending could unravel all of this and leave the BoJ with little choice but to engineer monetary tightening faster than the pace most households and firms would be happy with. Even though the Ministry of Finance tried to cool things down by stating that it intended to cut 20-, 30- and 40-year debt sales to help mend supply-demand imbalances, the real issue is fiscal.
“If a demand-less market continues and if investors see no rate hikes within this fiscal year, JGB volatility will go up, especially in the long end,” said Kentaro Hatono, a fund manager at Asset Management One.
Everything now depends on the result of Sunday’s election. A major defeat for the ruling coalition may lead to another sell-off in super-long JGBs as investors bet on a massively swollen government deficit.
The surge in yields, which have been rising steadily since the summer, has the potential to raise the cost of corporate loans and mortgages, in turn dampening domestic economic growth. Japan’s bond market readies for a volatile phase, with the election set to determine its fiscal course for years.
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