Japan bond sell-off sends shockwaves through global markets

Days after the rout, market participants were still grappling with the speed of the move.

Ultra-long Japanese yields leapt in a single session by amounts that previously would have taken weeks or even months.

The shock was amplified by sharp swings in the yen, underlining how quickly Japan’s financial conditions can now transmit stress beyond its borders.

At the heart of the turmoil is a shift in Japan’s backdrop.

Inflation, long subdued, has become persistent, and policymakers are facing growing pressure over living costs.

Core inflation rose 3.1% in 2025, marking a fourth straight year above the Bank of Japan’s 2% target.

The BOJ has already ended negative interest rates (in March 2024) and has been gradually stepping back from heavy bond buying, removing a key stabiliser from the market.

Investors are also uneasy about fiscal policy ahead of a snap general election on Feb 8, called by Prime Minister Sanae Takaichi.

Both the government and its opponents have been campaigning on looser budgets, while Takaichi’s stimulus and tax-relief push is seen as adding strain to an already enormous debt load.

Japan’s government debt is around 230% of GDP, the highest among Group of Seven nations.

In the latest sell-off, yields on the longest-dated bonds surged above 4%, levels that would have been hard to imagine during the era of near-zero rates.

The repercussions were quickly felt abroad.

The slump in JGBs weighed on US Treasuries and drew attention even among financiers gathered in Davos.

US Treasury Secretary Scott Bessent reportedly contacted Japan’s Finance Minister Satsuki Katayama to convey that the stress had spilt into American markets.

Analysts at Goldman Sachs have suggested that Japan-specific yield shocks can translate into incremental upward pressure on US yields, with knock-on effects elsewhere.

Tokyo’s markets remained choppy through the week.

BOJ Governor Kazuo Ueda said the central bank could buy bonds to calm trading, helping long-dated debt stabilise, yet the yen’s sudden drops and rebounds highlighted a “whack-a-mole” dynamic, as investors test how far officials will go to contain instability.

Speculation over currency support added another layer after signs emerged that US authorities were also paying close attention to yen moves.

Behind the turbulence is a fragile market structure.

Liquidity is thinnest in longer maturities, meaning relatively small volumes can trigger outsized price moves.

Foreign investors, while not the largest holders, now account for a far bigger share of trading activity, around 65% of monthly cash transactions, up sharply from 2009, making flows potentially more reactive to political and macro headlines.

The longer-term worry for global markets is “repatriation”: if Japanese yields stay high, domestic institutions could pull money back from overseas.

Roughly $5 trillion of Japanese capital is deployed abroad, and higher home yields are already prompting some large players to rethink strategy.

Sumitomo Mitsui Financial Group has said it plans to rebuild its JGB portfolio at the expense of foreign bonds, while major life insurers are also reassessing long-held overseas allocations.

Investors are now bracing for further swings, with some drawing comparisons to the UK’s 2022 “Liz Truss moment”, a scenario where fiscal credibility concerns collide with bond-market fragility and currency pressure.

Whether Japan finds a new equilibrium quickly or faces further shocks is becoming a central question for rates and risk assets far beyond Tokyo.

Bloomberg