Why Japan’s long-term bond yields have surged to multi-decade highs
Japanese government bond yields have been notching fresh highs as investors price in persistent inflation, tighter monetary policy, as well as fiscal uncertainty. Japan’s 30-year bond yield notched a record high on Wednesday to hit 3.286%, surging more than 100 basis points this year, while yield on the 20-year debt is at its highest since 1999 at 2.695%, up 80 basis points, LSEG data showed. The benchmark 10-year bond yield is hovering at its highest since 2008 at 1.633%, over 50 basis points higher in 2025. The 40-year yield is up around 90 basis points year-to-date at 3.506%. Rising yields translate directly into higher borrowing costs for the government, corporates and down the economy — particularly worrisome for Japan that is seeing weak growth and facing headwinds from U.S. tariffs, even as they have been relaxed from what was proposed earlier. Market watchers point to a cocktail of domestic and global forces behind the relentless surge in Japanese yields: the Bank of Japan’s ongoing policy normalization, inflation data that remains stubbornly above target, and political uncertainty that has emboldened fiscal expansion expectations. “There’s a lot of uncertainty in Japan,” said Julien Houdain, head of global unconstrained fixed income at Schroders. “Inflation is too high, real rates are too low — still way negative compared to other parts of the world where real rates have all moved positive a long time ago.” Japan’s real policy rate is at about -2.6%. Consumer prices have stayed above the BOJ’s 2% target for three straight years. The central bank has nudged up its short-term policy rate and scaled back bond-buying operations, all signaling that keeping yields contained will be a tough ask. JP30Y YTD mountain Yields on 30-year Japan government bonds since the start of the year “So the BOJ is under pressure, definitely … The 10-year, 30-year points are suffering, and there’s more and more competition globally for central banks and governments to find lenders at the long end,” said Houdain, noting that the BOJ was treading a balancing act to normalize policy without destabilizing the long-end of the bond market. Overseas investors’ appetite for Japanese bonds has also declined, with purchases slowing since April, Japan Securities Dealers Association data showed. The total purchase amount by foreigners fell 6% to 7.66 trillion yen in July compared to April’s figures. Some overseas investors have also been unloading government bonds and rotating into Japanese equities , driving its stock markets to fresh highs, analysts who spoke to CNBC noted. Political compulsions could lead to measures that expand the country’s fiscal deficit, further raising borrowing costs. In July’s upper-house election, opposition parties campaigning on consumption tax cuts made significant gains, weakening Prime Minister Shigeru Ishiba’s coalition. Barclays analysts note that the 30-year JGB term premium was already pricing in fiscal expansion “equivalent to 1–2pp of consumption tax cuts.” They warned that if broader opposition policies are adopted, “more drastic tax cuts could result in more significant upward pressure on JGB term premia and yields.” On Tuesday, Ishiba reportedly said he has “no intention at all of clinging” to his post. If he resigns, there could be a shift toward an era of multi-party systems, as well as a move toward an aggressive fiscal policy in Japan, said Ken Katsumoto, Japan macro strategist at Credit Agricole CIB. Repatriation in sight? Prolonged elevated yields are raising questions on whether higher JGB yields will impact domestic appetite to invest abroad, while also sparking a repatriation of capital. David Roberts, head of fixed income at Nedgroup Investments, said the repatriation has started, noting that his team has shifted funds out of the U.S. and UK into Japanese bonds for the first time in decades. “This is the first time since I started managing funds in the 1990s I have bought Japanese bonds,” he told CNBC. Japanese life insurers have also been net buyers of JGBs, focused on shorter-duration debt, while selling foreign bonds in July 2025, Eastspring Investments’ fixed income portfolio manager Rong Ren Goh noted. While some investors are starting to find the yields attractive enough, they’re not piling into long-term JGBs just yet because inflation and BOJ’s policy have clouded the outlook for yields. “Investors [will be] in no major hurry to aggressively leg into duration even as valuations appear more compelling,” said Goh. Barclays’ Kadota emphasized it could take time for flows to shift back home more concretely as Bank of Japan continues to embark on its quantitative tightening cycle. “The Bank of Japan is still on a hiking cycle, so investors are not rushing to buy JGBs yet until the end of the normalization cycle is in sight.” State Street’s head of Japan markets, Masahiko Loo, said that massive repatriation concerns from the U.S. are “not warranted,” noting that much of Japan’s holdings — like foreign reserves and pension funds — are structural and tied to the U.S.-Japan relationship. Banks, meanwhile, have plenty of cash parked at the BOJ they would shift into JGBs before selling foreign assets, while life insurers have already cut their overseas exposure during the Fed’s last hiking cycle. “Rising JGB yields do not imply a capital repatriation wave or a situation in which Japanese investors are pulling funds from the US, ultimately leading to global market disruption,” he said. UK 2022 gilt redux The sharp volatility in superlong JGBs since early this year, which accelerated further heading into the upper-house election in July when fiscal loosening became a major theme, spurred debates on whether Japan was heading into its own version of a so-called “Truss moment,” Barclays analysts noted in August. In 2022, then UK Prime Minister Liz Truss unleashed a wave of market panic with unfunded tax cuts that forced the Bank of England into emergency action after 30-year gilt yields soared by over 100 basis points. Stress has been building at the long-end of the yield curve, where investors are most sensitive to fiscal credibility. “Both [UK and Japan] feature risks concentrated more on the long end of the curve with the 30+ year maturities,” said Michael Gayed, author of the Lead Lag Report. “Plus, there are also fiscal concerns in the background centered around how to stimulate growth without taking on too much debt,” he said. While Barclays said, “Japan’s striking similarities to the UK suggest that a ‘Truss moment’ for Japan may not be as remote a risk as many may believe,” it is important to stress that some of Japan’s fiscal context differs from the UK’s. Japan’s pension sector is unlikely to face a systemic crisis as seen in the UK, given key differences, most notably in derivatives usage, said State Street’s Loo. UK pension funds used a lot of leverage and derivatives which magnified the impact of rising yields, he explained, leading to the panic. Conversely in Japan, pension funds tend to calculate their obligations using a fixed discount rate instead of marking them against current market rates. That means they apply a long-term assumed return to discount their future liabilities, and this assumption remains constant even when bond yields spike.
<
