Japan’s Bond Yields Surge to Multi-Decade Highs

Japan’s Bond Yields Surge to Multi-Decade Highs

In 2025, Japan’s government bond yields have surged significantly, signaling a historic end to the era of ultra-low and near-zero interest rates that defined Japanese finance for more than two decades. The yield on the 10-year Japanese Government Bond (JGB) recently climbed to around 1.7%, the highest level since 2008, while yields on 20-year and 30-year bonds reached multi-decade highs, with the 30-year yield hitting above 3.2%—levels not seen since the late 1990s.​

This surge in yields reflects investors’ expectations of persistent inflation, ongoing monetary policy tightening, and a large new fiscal stimulus package planned by the government. For many years, Japan maintained a zero or even negative interest rate environment in an effort to combat deflation and stimulate economic growth. However, persistent inflation above the Bank of Japan’s (BoJ) 2% target and rising wages have led to a fundamental shift in domestic bond markets.​

Policy Shifts Driving Market Repricing

The Bank of Japan has begun unwinding its ultra-loose monetary policy after holding rates near zero and engaging in massive bond-buying programs for years. The recent October 2025 policy meeting saw the BoJ keep the benchmark rate at 0.5%, but with increasing dissent from some board members pushing for rate hikes soon, possibly by December 2025 or early 2026.​

This cautious but clear shift comes as the BoJ adjusts to an economic environment where inflation is sustained, prompting a policy reversal after decades. At the same time, Prime Minister Sanae Takaichi, Japan’s first female PM who took office in late 2025, is advancing a ¥13.9 trillion ($92 billion) economic stimulus package focused on inflation relief, investment in strategic sectors like AI and semiconductors, and defense spending.

The combination of reduced bond-buying by the BoJ and increased bond issuance by the government to finance fiscal stimulus creates a "perfect storm" that drives bond yields up—the BoJ is no longer suppressing yields by buying bonds, while an elevated supply of new bonds pushes prices down and yields higher.​

Global Ripple Effects of Japan’s Yield Surge

Japan’s yield surge carries major implications globally. Japanese investors are significant holders of foreign government debt, especially U.S. Treasuries, with their holdings exceeding $1 trillion. As domestic rates become more attractive, these investors are likely to repatriate funds, reducing demand for foreign bonds and pushing global yields higher.​

This reversal threatens to unwind the decades-old "yen carry trade," where investors borrowed yen cheaply to invest in higher-yielding assets abroad. The unwinding can lead to market volatility as the increased demand for yen strengthens the currency and raises yields in other major economies, including the U.S. and Europe. Analysts estimate that even small increases in Japanese yields can pressure foreign bond yields upward, raising global borrowing costs.​

For Japan, the rise in yields means significantly higher government debt servicing costs, stressing a budget burdened with one of the highest public debt-to-GDP ratios in the developed world. Consumers and businesses will also face higher borrowing costs, affecting mortgages and investments.

Conclusion

Japan’s bond market is undergoing a historic transformation as the Bank of Japan starts to normalize monetary policy amid sustained inflation and government fiscal expansion. The surge in bond yields signals the end of an era of ultra-low interest rates that supported Japanese and global financial markets for decades. This shift carries profound implications for Japan’s economy, government finances, and global capital flows, potentially reshaping bond markets worldwide and increasing volatility as capital repatriates and global yields adjust.

The evolving policy landscape and stimulus programs illustrate Japan’s efforts to foster sustainable growth while managing inflation risks, but the journey ahead will likely be marked by challenges both domestically and internationally.