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Government bond markets should be seen, but not felt. These giant pools of capital are meant to move slowly. Japan, home to one of the biggest and usually most boring of all, is bucking that trend with a peculiarly sharp rise in long-term borrowing costs. It’s a largely local story so far, but one investors elsewhere should pay attention to.
Rising rates on long-term bonds have been causing concern worldwide, as investors worry about high levels of government spending in slowing, ageing economies. Even so, Japan’s recent moves stand out. Yields on its 30-year bonds have risen 0.63 percentage points, almost twice as much as their US counterparts, in the weeks since President Donald Trump’s so-called “liberation day” tariff plans triggered global market turmoil. Germany’s equivalents are virtually flat over that time.
Bond investors particularly dislike sharp rises in yields because the accompanying fall in prices can easily leave recently acquired bonds under water. A sale of 40-year Japanese government bonds on Wednesday drew only so-so demand — not the first such auction to do so — despite offering the highest yield, in decades at about 3.28 per cent.
Japan’s fiscal year-end in March is probably one factor behind the recent moves, with big local insurers and pension funds prettying up their books with new, higher-yielding bonds ahead of that point, and slowing their buying thereafter. There are also discussions between officials and bond traders and investors over how exactly the Bank of Japan should manage its bond holdings as it gradually tries to step away from the market. Japan could issue fewer super long-dated bonds to prop up demand, or the central bank could shift the mix of its buying to take more of them.
The rise in Japanese yields could be a blip. That’s not totally reassuring, admittedly: recall how a sharp, but temporary, move in UK government bond markets helped to unseat prime minister Liz Truss in 2022. Last week Prime Minister Shigeru Ishiba, pushing against tax cut calls, compared Japan’s fiscal position to that of Greece, which hardly helped calm investor nerves.
But if yields at these levels are a new normal, it will make overseas investments relatively less enticing to Japanese investors and draw money home, with what Société Générale analysts warn could be a “giant sucking sound.” In so far as Japan’s relatively unappealing returns have helped support long-term debt prices elsewhere, that could ultimately force governments to pay more for their borrowing.
Japan has often been considered a special case in bond markets. Its debt relative to GDP, is far higher than any other major economy. And years of central bank money-printing efforts to counter deflation and spark growth mean about half its vast $8tn bond market is held by the Bank of Japan and not traded. It’s true that Japan is different. Yet its size is still such that, when its bond yields rise so sharply, they have the potential to become other countries’ concern too.