Recent sharp rises in Japanese government bond yields have sent shockwaves through global debt markets. Yields on Japan’s ultra-long bonds surged, adding to turmoil fueled by concerns over widening fiscal deficits worldwide.
Volatility in Japan’s $7.8 trillion debt market has reached its highest level in over 20 years, Bloomberg analysis reveals. This shift has made global debt markets, including U.S. Treasuries and U.K. gilts, more sensitive to movements in Tokyo.
End of Bank of Japan’s Yield-Curve Control Shakes Global Markets
For years, Japan’s yield-curve control policy kept borrowing costs stable, acting as an anchor for global fixed income markets. But as the Bank of Japan (BoJ) eases this control, investors find less support, causing increased volatility and broader market spillovers.
“The rise in Japanese bond yields has had significant spillover effects around the world,” said Freddy Wong, head of Asia-Pacific fixed income at Invesco Ltd. As Japanese yields climb, the relative appeal of sovereign bonds from other countries drops, triggering sell-offs elsewhere.
U.S. Treasuries and Other Sovereign Bonds React Strongly
Japanese investors hold the largest foreign stake in U.S. debt, so shifts in Tokyo heavily influence U.S. Treasury yields. Since the BoJ began loosening yield controls in 2022, U.S. Treasuries have closely followed Japanese bond price moves. Similar correlations have been seen between Japanese and U.K. bonds.
In late May, after a weak 20-year Japanese bond auction, yields on 30-year U.S. Treasuries hit a 19-month high, illustrating this link.
Rising Fiscal Deficits and Inflation Heighten Risks
The surge in bond market volatility coincides with rising government borrowing and inflation worries globally. U.S. tax cuts and tariff tensions add to investor concerns, increasing pressure on longer-dated bonds.
Casey Jones, chief fixed-income strategist at Charles Schwab, noted that Japan’s status as a major creditor means volatility in its long-dated bonds has ripple effects worldwide.
Calls to Adjust Debt Issuance and Market Positioning
Market participants are signaling through Bank of Japan “Rinban” operations that the government should issue more short-term and fewer long-term bonds. This “twist” in issuance strategy aims to manage risks along the yield curve.
Given Japanese government bonds’ 16.7% weighting in global bond indexes, turbulence in Tokyo can directly cause losses for investors worldwide.
Bank of Japan Scaling Back Bond Purchases
The BoJ has begun reducing its massive bond purchases, holding more than half of Japan’s sovereign debt. In Q1 2025, BoJ holdings fell by 6.18 trillion yen ($43 billion), the largest drop since 1996. This reduction has contributed to higher yields and market instability.
The central bank may slow its pace of reductions starting April 2026 amid the turmoil, according to insider reports.
Fiscal Policy and Market Responses
Japan’s government is considering increasing domestic bond purchases to stem yield rises, as its fiscal policy draft emphasizes. Finance Minister Kato stressed the importance of dialogue with markets on bond issuance plans.
Mixed Views: Technical Sell-Off or Deeper Risks?
Some experts, like those at Pacific Investment Management Co., view the recent sell-off as technical and manageable. Rising yields make Japanese bonds more attractive, especially with yields on dollar-hedged 30-year bonds surpassing 7%.
Others caution that inflation pressures and ongoing bond purchase cuts could cause further yield increases and volatility. Shoichi Tokuoka of Mitsubishi UFJ Asset Management warned that yields on ultra-long bonds may not have peaked.
