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Japan's Bond Market Sell-Off Spreads to the World

Vikram Rai, Senior Economist | 416-923-1692

Date Published: January 20, 2026

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Japan's Bond Market Sell-Off Spreads to the World

  • Japanese government bond yields soared today in a broad sell-off in long-dated bonds, as the implications of all parties' election promises on government debt became clear to investors. As of writing, the 40-year is up +29 bps to a record high of 4.2%. 
  • What happens in Japan does not stay in Japan – the spike in long-term government bonds has spread to the U.S., the UK, Canada, and others. The U.S. 30-year was up +9 bps at its peak today, breaching 4.9% before settling below, while UK and Canada saw smaller increases in their 10-year government bonds yields of +4-6bps. 
  • This is a warning sign to heavily indebted nations that bond markets can turn rapidly if fiscal policy loses credibility, as happened in the UK in 2022.

Election promises fuel debt concerns

  • Japan is headed for a snap election, and while the governing party is projected to win, it has become clear that all parties favour policies that would significantly expand borrowing. 
  • The extent of added borrowing over the next several years has institutional investors on edge. 
  • Much of Japan's debt is held domestically, by large institutional investors, and are accordingly re-pricing their appetite for long-duration government bonds. We saw this in action in the weak results of Japan's auction of 20-year government bonds yesterday.

Contagion spreads

  • Three factors explain the contagion to overseas bond markets: 
    • The carry trade (borrowing in low-yield yen to invest in U.S. assets) is less attractive at higher yields. 
    • Following today's re-pricing, demand for foreign government bonds from Japanese institutional investors will be lower because they do not need to "reach for yield" as much anymore. 
    • Markets are re-pricing term premia globally as the implications of expanded borrowing become clear. The market for government debt is global and an expansion in one reduces the capacity of investors to absorb debt everywhere. This is happening at the same time as global markets are being rattled by geopolitical concerns.

What's next for Japan

  • The Bank of Japan meets later this week. While speculation is rife, central bank intervention is unlikely unless the sell-off continues and becomes disorderly. The current repricing is supported by fundamentals and, while alarming, is consistent with the Bank of Japan's desire for the yield curve to be market-determined. 

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