BOJ is losing a battle to stay afloat
Here’s a detailed breakdown of what’s happening with the Bank of Japan’s (BoJ) ultra-long bond yields — especially the 30-year government bond — what it means for Japan and the world, and what thresholds might trigger serious risks. For change this time i have also added links to the articles, i am referring to. I had mentioned earlier in my broadcast messages that we should keep a watch on japan as the global financial crisis can start from there.
What’s happening: 30-Year JGB Yields Rising
The yield on Japan’s 30-year government bond recently rose above ~3.30%, a historical high for that maturity. (Trading Economics
Major drivers
Monetary policy shift: The BoJ has wound back its ultra-easy policies. For years, the BoJ was heavily buying government bonds (JGBs) under Yield Curve Control (YCC), keeping long-term yields very low. That has changed: the BoJ is reducing purchases and allowing more market-determination of yields. (OANDA)
Increased issuance & fiscal pressures: The Japanese government is preparing a large supplementary budget (~¥25 trillion) under the new administration (Sanae Takaichi) and thus will issue more long-dated debt. Markets are anticipating increased supply, pushing yields up. (Financial Times)
Weak demand in the JGB market: Auctions of long-dated JGBs have seen “soft” demand (lower bid-to-cover ratios) which means investors are less keen to absorb new supply at low yields — thus yields must offer more “reward” (i.e., go higher) to attract them. (Reuters)
Global yield backdrop & inflation expectations: With global long bond yields (US, Germany, etc) rising, and inflation / growth prospects changing, even Japanese long-end rates are influenced. The premium investors demand for the 30-year horizon is going up. (OANDA)
Currency and inflation risk: As inflation in Japan picks up (core‐core CPI rising) and as the yen weakens, markets are pricing in higher term risk and expectation of higher future rates — so long rates move up. (OANDA)
Effects on Japan
Immediate and near-term impacts
Higher borrowing cost for the government: Japan already has one of the highest debt-to‐GDP ratios globally (~234.9% gross) and servicing cost is large. (Wikipedia) A move from say ~2 % to ~3.3 % on 30-year paper means future debt issuance is more expensive and rollover risk grows.
Impact on private sector: Long-term rates affect mortgage, corporate financing, infrastructure finance etc. Higher yields may feed into higher borrowing costs across the economy, potentially dampening investment.
Monetary policy tightening risk / constraint: The BoJ’s ability to fight inflation or stimulate growth is complicated when long-term yields are rising — it might need to raise short rates or conduct more QT/QE-reversal, which is politically and economically tricky.
Weakened fiscal cushion: With yields rising and debt high, any shock (slowdown, disaster, pension payment surge) becomes more threatening. The margin of safety shrinks.
Medium-to-longer term risks
Debt sustainability challenge: If yields rise persistently, debt servicing cost could grow faster than nominal GDP growth, leading to structural budget deficits, possible need for higher taxes, cuts in spending, or inflation‐monetisation pressures.
Crowding out of private investment: Government absorbs more of the capital markets, pushing up yields and reducing availability / increasing cost for private credit.
Asset price and currency effects: Rising Japanese yields may reduce the attractiveness of “carry trades” (borrowing yen cheaply and investing elsewhere). That could affect the yen (could strengthen if yield rises) but also global capital flows. Moreover, higher yields might dampen the Japanese stock market if growth expectations suffer.
Feedback loop to banks/insurers: Japanese insurers and banks hold large quantities of JGBs. When yields rise (prices fall), it can harm their balance sheets, which might lead to risk‐aversion and tighter credit. (OANDA)
Global Implications
Sovereign yield contagion: Japan is a very large bond market (JGB outstanding is huge). As yields rise there, they help set global long-end risk premia. The recent rise in the 30-year JGB has already been tied to rises in US and German long yields. (OANDA)
FX & carry trades: The traditional Japanese yen carry trade (borrow yen at low rates, invest elsewhere) could reverse. If yields in Japan rise, the advantage of borrowing yen disappears, which can lead to yen appreciation, global capital re-shifts, and volatility in emerging markets. (OANDA)
Global debt markets stress: If Japanese yields rise because of inflation/fiscal stress signals, that hints at underlying global risk (higher inflation, slower growth, lower liquidity). Investors globally may demand higher yields – this could translate into higher global borrowing costs, pressure on emerging markets, and asset‐price volatility.
Cross‐border flow shifts: Japanese investors have been big buyers of overseas assets. If domestic yields rise, they may shift capital from abroad to Japan, which could reverse “support” flows to US Treasuries, equities etc. This could destabilise global markets. (OANDA)
What could worsen and what thresholds matter
What could get worse
Runaway yields: If yields continue rising, the government debt servicing may balloon, requiring more bond issuance, fuelling a vicious circle of higher yields → bigger deficits → higher yields.
Loss of central bank control: If the BoJ loses control over the yield curve or inflation expectations get unanchored, there’s risk of inflation + weak growth (“stagflation”) plus balance-sheet stress for banks/insurers.
Liquidity / auction stress: If bond auctions fail (weak demand), yields spike, causing market stress and possibly forcing government to issue at very high yields. We’ve already seen weak auction demand in Japan. (Reuters)
Global spillover shock: A sharp rise in Japanese long yields could trigger a global repricing of long‐term risk, hitting equities, commodities, and emerging market debt hard.
Currency & export shock: If rising yields reflect inflation and/or a weaker yen, Japan’s export competitiveness may suffer, hurting growth, which in turn undermines fiscal strength.
What thresholds matter (approximate, not exact)
The jump above ~3.3% for the 30-year mark is already psychologically and structurally important (for Japan).
If yields for 30-year move beyond, say, ~4.0%, that could trigger meaningful debt servicing stress given Japan’s large outstanding volume and high debt-to-GDP ratio.
For the 10-year JGB, crossing perhaps ~2.5-3.0% might be a red flag for broader economy (since 10-year is often used for benchmarking).
More broadly, if the yield curve steepens or long‐end yields decouple and move aggressively upward while growth stalls, risk of fiscal/financial crisis rises.
While there’s no fixed “danger line,” many analysts see yields above ~3.5-4% on 30-year, or ~3% on 10-year, as thresholds where the debt servicing burden becomes significantly harder to manage. Given Japan’s debt/GDP, every 1% rise in average yield adds tens of billions of extra yen to servicing costs annually.
This View / Outlook
In my assessment:
The rise to ~3.3% on the 30-year is a warning signal, not yet a crisis. It reflects structural change: monetary policy normalization, higher inflation expectations, weaker demand for JGBs.
The BoJ and Japanese government still have policy tools (e.g., adjusting issuance, changing auctions, resuming bond buying if needed) but the margin for error is narrowing.
Globally: Markets should watch this closely as a canary in the coal mine for advanced-economy debt stress. If Japan’s yields keep rising, it will likely push up yields globally, tighten financial conditions, and raise recession risks.
The critical watchpoints: growth in Japan (especially real GDP and inflation), upcoming JGB auction demand/bid-to-cover ratios, BoJ communication/stance, how foreign investors and Japanese insurers respond, and global yield environment (US, Germany).
If yields move rapidly above ~4% on 30-year (or ~3% on 10-year) without commensurate growth pickup, then the risk of a broader financial dislocation starts to become meaningful: debt servicing, rollover risk, credit markets, possibly sovereign risk premiums rising.
A blog by the faceless narrator Deepak Paranjape
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