Reported by Tahir Ishaq Shehu
Japan’s government bond market is under mounting pressure as political uncertainty and fiscal fears ahead of the July 20 upper house election send yields soaring to multi-decade highs, rattling investors and intensifying scrutiny on the Bank of Japan’s next move.
Yields on long-dated Japanese government bonds (JGBs) surged across the curve on Monday. The 30-year yield rose to a record high near 3.20%, while the 20-year touched levels not seen since 1999. Even the 10-year benchmark yield climbed to around 1.60%, its highest level since the global financial crisis in 2008.
Election Anxiety Roils Market
The spike in yields comes as polls show Prime Minister Shigeru Ishiba’s ruling coalition trailing opposition parties who have campaigned aggressively on promises of tax cuts and expanded public spending. Market participants fear that an opposition win or even a weakened ruling bloc could usher in looser fiscal discipline, adding to Japan’s already enormous public debt burden, which stands at roughly 250% of GDP.
“The risk premium for Japanese debt is being re-priced,” said one Tokyo-based fund manager. “The market is signaling deep concern about the fiscal trajectory if political change undermines efforts at long-term consolidation.”
Central Bank Caught in the Middle
Compounding the selloff is the Bank of Japan’s cautious approach to rate normalization. After ending its yield curve control program earlier this year, the BOJ has been stepping back from large-scale bond purchases. With global economic conditions still fragile, policymakers have hesitated to raise interest rates further, even as inflation remains above target.
But the surge in yields is putting pressure on the central bank to act either by intervening in bond markets or accelerating policy tightening, both of which carry their own risks.
“The BOJ is walking a tightrope,” said Takashi Nakamura, chief economist at Daiwa Securities. “Raise rates too fast, and it could derail the fragile recovery. Stay dovish, and the market may spiral out of control.”
Global Implications
Japan’s bond market stress is already rippling through global markets. Analysts have warned that rising yields could spur capital outflows, with Japanese investors reducing overseas holdings to repatriate funds. This could weigh on global equity and bond markets, especially in the U.S. and Europe.
Albert Edwards, a strategist at Société Générale, compared the situation to the UK’s gilt market crisis in 2022, warning of a potential “financial armageddon” if bond volatility persists unchecked.
Policy Response in Focus
In response to the sharp moves, the Ministry of Finance has already taken steps to reduce pressure on the super-long end of the curve, scaling back issuance and exploring buyback options. Additional measures may follow depending on the election outcome and market conditions.
Still, much hinges on voter sentiment and political arithmetic.
“If opposition parties gain significant ground, markets will likely price in further fiscal slippage,” said Mizuho Securities’ rates strategist Yuki Sato. “The shape of the yield curve could steepen dramatically.”
What to Watch
All eyes are now on the July 20 election and the BOJ’s policy meeting later this month. Investors will be looking for signals of whether the central bank is prepared to step in to stabilize markets or whether political developments will force its hand.
Bottom line:
Japan’s bond market is flashing red as political uncertainty, debt concerns, and monetary policy caution converge. With yields at multi-decade highs and global markets on edge, the outcome of this week’s election could have far-reaching consequences beyond Tokyo.
