From Tokyo to Treasurys

Japan’s famously sleepy bond market just sat bolt upright.

A sharp selloff sent the 40-year yield above 4%, the highest since the maturity was introduced in 2007, and the first time any Japanese sovereign yield has crossed that level in more than 30 years. For a market best known for doing absolutely nothing, that’s practically a tantrum.

The selloff was fueled by political and fiscal concerns: Prime Minister Sanae Takaichi signaled a snap election for Feb. 8 in order to secure a public mandate for her economic growth plans, which include suspending Japan’s 8% food sales tax for two years, a policy expected to cost about $31.6 billion annually. When combined with a $135 billion spending package announced in November and a national debt already near 250% of GDP, investors are now demanding higher yields to absorb the risk.

When cheap yen isn’t so cheap

The surge in Japanese yields points to a broader regime shift. After decades of near-zero rates that kept Japanese government bond yields well below global peers, financial conditions are beginning to tighten.

The Bank of Japan’s rate hike last month, the first since January, paired with a sharp rise in long-dated yields is reviving a familiar risk: stress in the yen-funded carry trade.

Carry trades depend on borrowing cheaply in yen to invest in higher-yielding assets overseas. When Japanese yields rise or the yen strengthens, those trades can unwind quickly. That dynamic played out in August 2024, when forced deleveraging spread across markets, from US Treasurys to equities, helping drag the S&P 500 down about 8% in the first week of the month.

If Japanese yields keep climbing, don’t be surprised if the sequel drops.

US feels it next

Japan’s bond selloff has direct implications for US markets, where government borrowing is heavily reliant on foreign capital to fund large external deficits. Japanese investors have long been among the biggest buyers of that debt, holding about $1.2 trillion of US government securities as of November 2025.

“Now that their yields are going up, you’re likely to see that Japanese bond investors may be more likely to stay home and invest in their own bonds rather than in the US, so that could put some upward pressure on US bond yields,” Ed Yardeni of Yardeni Research told CNBC.

For global markets built on cheap yen, the bill may finally be coming due.—SY