Japanese bond market hits 27-year high: Why traders are abandoning central bank policies and turning to fiscal risks

The Japanese government bond market is experiencing a sustained sell-off. As we enter 2026, this pressure has not eased; instead, it is accelerating. The 10-year government bond yield has reached its highest level since February 1999, indicating that Japan’s bond market is facing its most severe test in 27 years.

Specific manifestations of the bond market sell-off

According to the latest news, yields on Japanese government bonds across all maturities have risen:

This is not short-term volatility. Analysis shows that over the past three months, the selling pressure in Japan’s bond market has accelerated, indicating a fundamental shift in market sentiment.

The deeper logic behind the market shift

This wave of sell-off reflects a key change in market mindset:

• Fiscal risks take precedence over policy expectations: Traders and investors are increasingly focused on Japan’s fiscal and economic issues rather than the Bank of Japan’s policy stance or narrowing interest rate differentials.
• Yen pressure intensifies: Despite spillover pressures on the yen, the bond market sell-off indicates that investors are more worried about Japan’s economic outlook.
• Systemic risks emerge: Analysts believe that the trend in the bond market may be the biggest risk facing the Japanese economy this year.

Why is this critical?

What does the abnormal movement in Japan’s bond market usually signify?

It indicates that the market no longer believes the central bank can solve problems through interest rate policies. When investors start selling large amounts of government bonds, pushing yields higher, it suggests they are re-evaluating Japan’s economic risks. In the long run, this could mean rising financing costs for Japan, increased government debt burdens, and limited fiscal policy space.

From a global market perspective, Japan, as the world’s third-largest economy, often triggers chain reactions when its bond market moves. When Japanese government bond yields soar, they typically increase volatility in global risk assets, including stock markets, foreign exchange markets, and cryptocurrencies.

Summary

This wave of sell-off in Japan’s bond market signals an important shift: the market is moving from a “central bank policy-driven” outlook to a “fundamentals risk-driven” outlook. The 27-year high in the 10-year government bond yield is not just a number but a reflection of investors’ reassessment of Japan’s economic prospects. Governments and central banks need to closely monitor this trend, as bond markets often reflect economic realities earlier than other markets. For global investors, the pressure on Japan’s bond market may just be the beginning of this year’s volatility in risk assets.