By [Your News Organization], July 23, 2025
As the editor of this publication, I’m compelled to highlight the escalating crisis in Japan’s government bond (JGB) market, where yields have spiked to levels not seen in nearly two decades. The benchmark 10-year JGB yield hit 1.6% this week, a peak last reached in October 2008, while 20-, 30-, and 40-year bond yields have soared to record highs. This upheaval, driven by a toxic mix of political uncertainty and fiscal concerns, demands urgent attention from global investors and policymakers alike.
The immediate trigger lies in Japan’s political turmoil. Prime Minister Shigeru Ishiba’s Liberal Democratic Party and its coalition partner Komeito suffered a bruising electoral defeat, fueling speculation that Ishiba may step down. The prospect of a new, potentially less fiscally disciplined leadership has rattled markets. Opposition parties, notably the populist Sanseito, are pushing for consumption tax cuts, a move that could further erode Japan’s fiscal position, already burdened by a debt-to-GDP ratio approaching 260%—one of the highest in the world.
This political chaos has collided with a stark reality in the bond market: buyers are fleeing. The Ministry of Finance’s latest auction of super-long bonds revealed the weakest demand in nearly 14 years, with the bid-to-cover ratio for 20-year bonds plummeting to levels last seen in 2012. Investors are demanding higher yields to offset the risks of Japan’s deteriorating fiscal outlook and the potential for sustained inflation, which hit 3.1% in Tokyo this June. The Bank of Japan (BOJ) now faces a precarious balancing act. Raising interest rates to curb inflation risks derailing economic recovery, especially under pressure from a new U.S.-Japan trade deal and global trade war concerns. Yet maintaining loose policy could further weaken the yen and exacerbate market instability.
The ripple effects are global. Japanese investors, holding $2.3 trillion in foreign bonds—including $1.13 trillion in U.S. Treasuries—may repatriate capital as JGB yields rise, potentially unwinding the yen carry trade. This could strengthen the yen, disrupt global debt markets, and pressure U.S. Treasury yields. The JGB futures market is already reeling, with 10-year futures dropping to 137.54 yen, the lowest since March 28, 2025. Super-long bond yields are at historic highs—30-year bonds at 3.21% and 20-year bonds at levels unseen since 1999.
As we go to press, the Ministry of Finance is reportedly considering a reduction in super-long bond issuance to stabilize yields, but the path forward remains fraught. This crisis underscores a broader reckoning for Japan’s bond market, long a cornerstone of global stability. Investors are no longer willing to treat JGBs as a risk-free asset, and the consequences could reshape markets worldwide. Stay tuned as we continue to monitor this unfolding story.
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