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Aileen Chuang

A sudden spike in volatility in Japanese government bonds (JGBs) – long seen as among the world’s safest assets – is stoking concern that risk aversion is rippling through Asian markets across asset classes, according to analysts.
Investors have repriced the term and risk premiums on JGBs as fiscal worries that started simmering last year have flared again after Prime Minister Sanae Takaichi pledged tax cuts and higher spending.
The 40-year bond yield rose above 4 per cent on Tuesday, the highest since its 2007 debut, while the 10-year note temporarily climbed to a fresh 27-year high of 2.37 per cent.
While longer maturity JGBs rebounded on Wednesday after government officials called for calm, analysts said more volatility could persist into the first half of this year.
“The bond sell-off in Japan could spark a risk-averse sentiment in Asia, with contagion effects on bonds and equities,” said Gary Ng, a senior economist at Natixis Corporate and Investment Bank.
The latest JGB turmoil could see some investors forced to sell up to US$130 billion worth of US Treasuries to cut risk across their portfolios, according to a Citigroup Global Markets report on Tuesday.
Mohammed Apabhai, the US bank’s head of Asia trading strategy, wrote that risk parity funds, which balance exposure across stocks, bonds and commodities to maintain equal volatility, might be forced to cut up to a third of their current positions.
The South Korean bond market, for example, was particularly vulnerable to rising JGB risks, Apabhai added.
“If JGBs begin to affect other bond markets, it will mean tighter global liquidity for Hong Kong, reducing capital inflows and affecting valuations,” said Ng. However, the impact on China’s onshore market would be more contained given its low correlation with international markets, allowing it to serve as a potential shelter, he added.
“Japan is not alone in this, but it is the clearest expression of it today,” said Stephen Innes, a managing partner at SPI Asset Management, referring to a heavily indebted sovereign with deep domestic ownership, political pressure to spend and a central bank constrained by politics.

Takaichi dissolved parliament on Monday to capitalise on strong public support and call for a national election on February 8, pledging to scrap the 8 per cent consumption tax on food for two years.
The plan, costing about 5 trillion yen (US$31.6 billion) annually – around 0.8 per cent of Japan’s gross domestic product – would likely be funded through additional bond issuance, raising doubts about fiscal discipline.
Markets feared the temporary tax cut could become permanent, worsening Japan’s already heavy debt burden and driving long-term yields higher.
“We expect curve steepness is likely to persist through the first half of 2026, with volatility anchored by ongoing supply–demand frictions,” said Masahiko Loo, senior fixed income strategist at State Street Investment Management, in a note on Tuesday.
However, bond yield curves should stabilise and gradually flatten as Japan’s Ministry of Finance adjusts issuance and domestic banks “re-emerge as meaningful buyers”, Loo said.
The market has been speculating about when banks and other institutional investors will head back to the JGB market after seeking higher returns overseas.
Japan’s second-largest bank, Sumitomo Mitsui Financial Group, was planning sizeable JGB purchases in the wake of the surging yields, according to its global markets head in an interview with Bloomberg published on Wednesday.
Until the volatility subsides, investors would reposition, widen spreads and buy insurance, SPI Asset Management’s Innes said.
Gold has emerged as a safe haven amid elevated geopolitical risks. Gold prices were boosted to a record high above US$4,800 per ounce on Wednesday.


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Market Snapshot

Japan’s yield spike is testing safe-haven assumptions, with markets debating whether the movement is local or systemic


Japan’s yield spike is testing safe-haven assumptions, with markets debating whether the movement is local or systemic.


Japan bond volatility raises contagion alarm for Asia’s stocks and debt

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Japan’s yield spike is testing safe-haven assumptions, with markets debating whether the movement is local or systemic

Japan’s yield spike is testing safe-haven assumptions, with markets debating whether the movement is local or systemic