Japanese government bonds (JGBs) saw a modest recovery on Friday, following a turbulent week that pushed long-term yields to historic highs amid rising concerns over inflation and Japan’s fiscal trajectory.
Yields on the 30- and 40-year JGBs, which move inversely to bond prices, fell from record levels reached earlier in the week. The 30-year yield dipped five basis points to 3.115%, down from a peak of 3.185% on Wednesday. Similarly, the 40-year yield declined by seven basis points to 3.6%, retreating from Thursday’s all-time high of 3.675%. Shorter-term bonds also saw relief, with the benchmark 10-year yield slipping 1.5 basis points to 1.545%.
The rebound followed a rally in US Treasuries, but market participants remain cautious. Shinsuke Kajita, chief strategist at Resona Holdings, noted that concerns persist with upcoming auctions for long-dated bonds such as 40-year JGBs scheduled for next week.
Recent increases in yields were fueled by concerns over Japan’s fiscal sustainability, as some political factions propose cutting the consumption tax to ease the burden of rising prices. These proposals have raised alarm over the government’s debt load and its capacity to finance spending through new bond issuance. A weak auction of 20-year bonds earlier in the week further highlighted the market’s growing hesitation to absorb long-term debt.
Friday’s data showing Japan’s core consumer inflation accelerating to 3.5% in April—its fastest pace in over two years—has added pressure on the Bank of Japan (BoJ) to continue tightening monetary policy. BoJ Governor Kazuo Ueda acknowledged the sharp yield movements and pledged to monitor market trends closely.
Market analysts, including those at Mizuho, warned of the risk that ultra-long JGBs could become “indigestible” for the market, suggesting a possible shift toward issuing shorter-term debt.
Beyond domestic concerns, the global implications of rising JGB yields are drawing attention. Societe Generale strategist Albert Edwards warned that the surge in Japanese long-term interest rates could disrupt global financial markets, particularly the so-called “yen carry trade.” This investment strategy, where investors borrow in yen at low rates to invest in higher-yielding assets abroad, may unravel if rising domestic yields draw capital back to Japan.
Edwards also pointed to the Bank of Japan’s withdrawal from its ultra-loose monetary stance, including a reduced presence in the bond market and the decision to let bond holdings roll off its balance sheet. As a result, foreign investors—who now hold a significant portion of Japanese debt—could face increased volatility.
“The rout in Japanese bonds is potentially a major turning point,” Edwards wrote in a recent client note. “With Japanese investors possibly repatriating funds, markets abroad, including US equities and Treasuries, could come under pressure.”
Reuters and Business Insider contributed to this report.
