Japan's Bond Market Turmoil Raises Global Financial Stability Concerns

28 May 2025

Credit: Bloomberg

Japan's government bond market is experiencing significant volatility, with the latest 40-year bond auction revealing tepid demand. The bid-to-cover ratio dropped to 2.21, the lowest since July 2024, signaling investor apprehension about the nation's fiscal health .

Long-term Japanese Government Bond (JGB) yields have surged, with the 40-year yield reaching a record 3.675%. This spike is attributed to concerns over Japan's escalating debt, which stands at over 248% of its GDP, and the government's reduced bond-buying activities

The Ministry of Finance (MOF) is contemplating a reduction in the issuance of super-long bonds, potentially reverting to pre-COVID levels. Such a move aims to stabilize the bond market and address investor concerns .

Globally, the ramifications are profound. The rise in JGB yields threatens the viability of the yen carry trade, where investors borrow in yen at low rates to invest in higher-yielding foreign assets. A reversal of this trade could lead to significant capital outflows from global markets, particularly the U.S., which has benefited from Japanese investments .

Analysts warn that the situation in Japan could be a precursor to broader financial instability. With other nations also grappling with high debt levels and rising yields, the global financial system faces mounting pressure .

As Japan navigates these challenges, the decisions made by its financial authorities will be closely watched, given their potential to influence global economic stability.