Japan has been back in the spotlight recently, but not for good reasons. Its economy is struggling with slow growth and very high debt. Gross government debt is near 250% of GDP, far above the US or Europe. For years, investors barely noticed because the Bank of Japan kept long-term borrowing costs low through heavy bond buying and yield caps.
That stability is changing. Since 2024, the Bank of Japan has reduced its market intervention, allowing yields to move more freely. Inflation has returned, and nominal growth has picked up. These forces pushed long-term bond yields higher. In one day, the 40-year government bond yield crossed 4% for the first time ever. Markets reacted quickly. Domestic insurers sold heavily, and global yields rose within hours.
Political decisions added fuel to the fire. The government announced a large fiscal package and a two-year suspension of the food sales tax, costing around ¥5 trillion a year. Officials said no new borrowing was needed, but details were scarce. Markets priced in the risk before clarification.
The violent bond market reaction is linked to market structure. Ultra-long bonds don’t move based on central bank rates alone. They respond to supply, demand, and credibility. When investors expect more issuance, yields rise. Japanese insurers and pension funds, once stable buyers, are now selling. Foreign investors dominate trading today. They move quickly and unwind positions if prices shift, amplifying volatility.
The Bank of Japan did not step in immediately. That was deliberate. After years of distorting markets, it wants to restore price discovery. Intervention is reserved for true dysfunction, not every uncomfortable repricing. Without a guaranteed buyer, yields moved to levels investors were willing to hold. For 40-year bonds, that meant above 4%.
Japan’s move affected global markets because it sits at the center of several mechanisms. Its long-term yields anchor global rates. Rising Japanese yields forced selling in US and European bonds. The yen is a major funding currency, and higher yields combined with a weaker yen put pressure on carry trades. Volatility spread across equities, credit, and emerging markets. When Japan’s perception as a stable market cracked, investors reassessed risk everywhere.
The key takeaway is that Japan is no longer insulated from market discipline. Its debt is not in danger of default. The government still has fiscal capacity, and most debt is domestically held. What changed is pricing. Long-term rates can move quickly, fiscal signals now matter, and foreign capital sets prices at the margin.
Investors can no longer ignore Japan. Its bond market repricing feeds directly into global rates and risk appetite. This is not about collapse. It is about a market that now reacts quickly to economic and policy signals, sending ripples across the world.
