FX.co ★ Japan’s bond market worth $7.3 trillion becomes source of global volatility

The global financial system has encountered a new source of risk: the Japanese government bond market, long regarded as a bastion of stability, is rapidly destabilizing. Last week, yields on Japan’s government bonds soared, putting traders around the world on edge. The yield on 40‑year bonds topped the 4% mark for the first time, and 30‑year yields swung by more than a quarter of a percentage point in a single session — a move that used to take months. The market capitalization of Japan’s sovereign yield curve plunged by $41 billion in one day.

The roots of the crisis lie in a mix of structural and political factors. Inflation has surpassed the Bank of Japan’s 2% target for the fourth year running, undermining the case for zero interest rates. At the same time, Prime Minister Sanae Takaichi, preparing for snap elections on February 8, pledges large fiscal spending, inflating an already enormous public debt of 230% of GDP — a level incompatible with long‑term fiscal stability.

Turbulence in Tokyo is producing a ripple effect across global markets. Goldman Sachs estimates that every 10 basis points of higher Japanese yields adds 2–3 bps to rates in the US and other countries. Wild yen moves have sparked market nervousness, including at the Federal Reserve and the US Treasury. So, market participants are braced for currency intervention.

Potential repatriation of Japanese capital poses a grave risk to global markets. Japanese investors hold more than $5 trillion abroad, mainly in foreign government bonds. As domestic yields rise, Japanese debt becomes more attractive: 30‑year JGB yields have already surpassed those of Germany and China. Major players such as Sumitomo Mitsui have announced plans to revise portfolios and shift focus away from foreign bonds back to Japanese ones. A mass capital withdrawal by Japanese investors could crash US and European government bond markets, driving yields higher at a very inopportune point in the economic cycle.

Masayuki Koguchi of Mitsubishi UFJ Asset Management described the situation as “a new era” and warned, “This is only the beginning. There is a chance we will see even stronger shocks.” That assessment signals market participants are ready for lingering high volatility rather than imminent stabilization.