Japan’s long-term JGB yields hit a record high, here’s why it matters

The months of April and May 2025 have seen rapid movements and upside volatility in yields in Japan’s $7.8 trillion government debt market, particularly in the longer-term maturity of Japanese Government Bonds (JGBs).

The 30-year JGB yield skyrocketed by 100 basis points (bps) from its 7 April 2025 intraday low to hit a fresh all-time intraday high of 3.2% on 21 May 2025. The rapid surge in the 30-year yield has doubled the level of the more commonly cited 10-year JGB yield, which has also ascended rapidly after being near zero just four years ago — the 10-year yield advanced by 53 bps from its 7 April 2025 low of 1.06% to print an intraday high of 1.59% on 22 May 2025, close to a 17-year high (see Fig. 1).

In this article, we will examine the key drivers that led to the spike in the 30-year JGB yield, its recent impact on global financial markets, and the key events and things to monitor next.

Japanese government bonds have been considered one of the most stable sovereign debt markets globally for decades. The primary reason for that was due to the Bank of Japan (BoJ)’s ultra-easy monetary policy, which implemented the unorthodox yield curve control (YCC) program in September 2016 to fix the 10-year JGB yield at around 0% in order to stimulate the Japanese economy and eradicate a persistent trend of deflation in place since the 1990s after the massive property bubble burst.

Hence, BoJ is being seen as the “whale” of the JGB market due to its massive bond buying activities to implement its YCC program, which led BoJ to become the biggest dominant investor in JGBs that owns more than half of Japan’s sovereign bonds (see Fig. 2).

The core-core inflation trend (excluding food and energy) has picked up in Japan in late 2022 and surged past the 2% target set by the BoJ, together with rising wages. Eventually, the BoJ shifted its gear from ultra-easy to normalization monetary policy in March 2024, ended negative rates and the YCC program, and hiked its short-term policy interest rate for the first time in 17 years.

Without the BoJ’s massive bond-buying activities, the yields in the JGB market are allowed to move more freely according to fundamentals and market participants’ expectations. In addition, the BoJ has embarked on a quantitative tightening (QT) plan since July 2024, where it aims to reduce its bond purchases.¹

So far, BoJ has slashed 21 trillion yen from its balance sheet and has been cutting purchases by 400 billion yen worth of debt each quarter to halve monthly purchases to 3 trillion yen by March 2026. Therefore, BoJ is now no longer a “whale” in the JGB market that gobbles up massive amounts of sovereign bonds to suppress their yields.

Japan’s life insurance sector holds approximately 13% of the total outstanding Japanese Government Bonds (JGBs), making it the second-largest investor group after the Bank of Japan.

Recent months of heightened volatility and low liquidity have deterred Japanese life insurers from buying more of Japan's sovereign bonds, increasing upward pressure on yields.

In contrast, other market participants are expecting this key group of investors to step up JGB purchases this year after interest rates shifted higher with the BoJ’s commitment to normalize its monetary policy.

The lack of demand from Japanese life insurers is likely due to the fear of increased volatility triggered by the US White House Administration’s erratic approach to implementing trade tariffs, which in turn creates uncertainty over the BoJ’s interest rate hike path.

Overall, Japanese life insurers had trimmed their JGB holdings by 1.35 trillion yen in the three months through March 2025, the third-largest reduction on record and the steepest reduction since 2017, according to Bloomberg analysis data from the BoJ and Japan Securities Dealers Association (see Fig. 3).

The acute spike in the 30-year JBG yield observed during the two months of May and June has also been accompanied by synchronized upward movements in other longer-term sovereign bond yields, albeit at a slower pace. The 30-year US Treasury bond yield rose by 81 bps to print an intraday high of 5.15% in May, and the 30-year German bond yield rallied by 36 bps to print an intraday high of 3.20% over the same period (see Fig. 4).

In addition, uncertainty surrounding the implementation of US global trade tariffs ex-post, US President Trump’s “Liberation Day” tariffs in April, have led market participants to question the effectiveness of implementing expansionary monetary policies to negate the potential adverse effects on global economic growth caused by US tariffs, where expansionary fiscal policies are required as pro-growth cyclical substitutes, in turn, further widen governments’ budget deficits.

In the US, longer-dated Treasury yields climbed further after Moody’s Ratings downgraded the country’s credit outlook. The downgrade was driven by concerns over President Trump’s proposed large-scale tax cuts, which are expected to widen the federal budget deficit significantly over the next decade.

The Senate version of President Donald Trump's tax bill would add nearly US$3.3 trillion to US deficits over a decade, according to the Congressional Budget Office, higher than CBO's US$2.8 trillion projected cost of the version passed by the House.

Eventually, the climb in super-long sovereign bond yields may make corporate loans and mortgages more expensive, which may dampen global economic growth prospects.

The rising longer-term JGB yields may narrow the yield spread discount against the rest of the world’s sovereign bonds, amplified by an unwinding of carry trade trading and investment strategies deployed by Japanese investors.

In the past decade, the Japanese yen has been used as a funding instrument due to an ultra-low-interest rate environment in Japan engineered by the BoJ’s ultra-easy monetary policy, and funded proceeds will be recycled into overseas financial markets such as US debt and equities.

Hence, if the 30-year JGB yield continues to rise rapidly in a short time, the significant capital allocation adjustment may take shape in the reverse where Japanese investors are likely to pull money out of US Treasuries and invest in JGBs due to higher attractive yields offer by longer maturity JGBs (10 year and 30 year).

This adjustment process may affect the movements in the FX market, particularly involving the Japanese yen currency pairs.

The prior episode has been from February 2024 to June 2024. In light of the start of BoJ’s “gradual interest rate hike policy”² , the yield of the 30-year JGB shot up by around 65 bps (high to low), which led to the yield spread discount of the 30-year US Treasury and 30-year JGB to narrow by a significant movement of around 60 bps over the same period (see Fig. 5).

This significant narrowing of the yield spread between the 30-year US Treasuries and JGBs had a leading effect on the movement of the USD/JPY, where it tumbled later by -13% (high to low) from July 2024 to September 2024.

Similarly, a basket of G-10 JPY crosses equally weighted against the major currencies (AUD, NZD, CAD, SEK, NOK, EUR, GBP, CHF, and USD) has declined by -13% (high to low) from July 2024 to August 2024.

The most recent 100 bps spike in the 30-year JGB yield from April to May has led to another round of narrowing of the 30-year US Treasury-JGB yield spread, albeit at a slower pace of 36 bps from April versus the prior steeper 60 bps contraction seen from April 2024 to July 2024.

So far, the USD/JPY has only shed by -1.9%, and negligible movements are seen on the equally weighted basket of G-10 JOY crosses.

The primary reason for the BoJ to end its ultra-easy monetary policy in March 2024 is the rapid rise in the trend of the national Japan core-core CPI (excluding fresh food and energy) data since 2022.

After a dip of 2.4 percentage points from 4.3% y/y recorded in August 2023 to July 2024’s print of 1.9% y/y, Japan’s core-core CPI has increased to 3.3% y/y in May 2025, holding steady above BoJ’s long-term inflation target of 2% for the past seven months, and its highest level since January 2024 (see Fig. 6).

The leading Tokyo’s core-core CPI trend for June 2025 grew by 3.1% y/y, slightly below May’s 3.3% y/y. The national Japan CPI data for June will be released on July 17.

To slow down the pace of the increase in the 30-year JGB yield that may increase the debt burden on the government budget deficit, and the cost of funding for Japanese corporations, the BoJ has tapered its quantitative tightening (QT) program announced at the recent June 17 monetary policy meeting.

BoJ will slow down the pace of its reduction of JGB purchases from the next fiscal year to quarterly reductions of 200 billion yen from the current 400 billion yen.

However, if inflation in Japan continues to come in hotter than expected, BoJ may be forced to resume its interest rate hike cycle in Q3 that may trigger another spike in the 30-year JGB yield.

Footnotes

¹ https://www.boj.or.jp/en/mopo/mpmdeci/mpr_2024/k240731b.pdf

² https://www.boj.or.jp/en/mopo/mpmdeci/mpr_2024/k240319b.pdf