by Daniel Siluk, Head of Global Short Duration & Liquidity, Portfolio Manager, Janus Henderson
Japanese government bond (JGB) yields have surged dramatically over the past year, with that of the 10-year rising from 0.80% in September 2024 to roughly 1.60% this July. The 2-year yield has also doubled over the same period, rising from 0.40% to 0.80%. These are the highest yields JBG’s have registered since 2008.
The move reflects a significant shift in Japan’s monetary landscape, as the Bank of Japan (BoJ) continues its gradual exit from ultra-accommodative monetary policy. The central bank held its benchmark rate at 0.50% at its last meeting in June but raised its policy rate from -0.10% in March 2024, when it began its hiking cycle.
While the most recent decision was to pause on rates, the BoJ has kept up its tightening campaign by beginning to taper its bond purchases, aiming to reduce monthly JGB purchases from 4.1 trillion yen, currently, to 2 trillion yen by 2027.This pace aligns with recommendations the BoJ received from several market participants when it surveyed the investment community in May.
Why now?
This normalization process is occurring against a backdrop of persistent inflation, which has remained above the BoJ’s 2.0% target for over three years. The central bank tightening path now faces headwinds in the form of domestic political uncertainty. With a pivotal Upper House election having taken place this past weekend, markets are pricing in the risk of fiscal expansion and political resistance to additional rate hikes.
Opposition parties campaigned on platforms that include consumption tax cuts and looser monetary policy, which could pressure the BoJ to delay further tightening. The potential for increased fiscal spending, however – possibly funded by additional bond issuance – has already pushed long-dated yields to multi-decade highs, with the 30-year JGB yield having reached 3.2% in May.
Why this matters – and not just in Japan
The implications for global rates are significant. Japan’s role as a major exporter of capital means that a scenario in which domestic yields continue to rise could reduce Japanese investors’ appetite for foreign bonds, particularly U.S. Treasuries and European sovereign debt. This could exert upward pressure on global yields, especially at the long end of the curve. Moreover, if Japan’s fiscal trajectory deteriorates further, it could trigger broader concerns about sovereign debt sustainability in other high-debt economies, amplifying volatility across global bond markets.
In summary, the BoJ’s cautious normalization is being tested by both domestic political dynamics and global macroeconomic uncertainty. The sharp rise in JGB yields is not just a local story; it’s a signal that the era of global yield suppression and the Global Financial Crisis era of “new normal” –defined by low policy rates and quantitative easing – has drawn to a close. Welcome back to the “old normal”.
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IMPORTANT INFORMATION
Foreign securities are subject to currency fluctuations, political and economic uncertainty, increased volatility and lower liquidity, all of which are magnified in emerging markets.
Fixed income securities are subject to interest rate, inflation, credit and default risk. As interest rates rise, bond prices usually fall, and vice versa.
Sovereign debt securities are subject to the additional risk that, under some political, diplomatic, social or economic circumstances, some developing countries that issue lower quality debt securities may be unable or unwilling to make principal or interest payments as they come due.
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