Japan’s government bond market experienced intense volatility on Tuesday, with the 40-year bond yield breaking through the 4% threshold for the first time, hitting a new high since issuance in 2007; on the same day, the bid-to-cover ratio for the 20-year bond auction was only 3.19, significantly below the 12-month average of 3.34. Market concerns are mounting that Prime Minister Sanae Takaichi’s food consumption tax reduction policy will increase fiscal burdens, with insurance companies setting a record by selling 8,224 billion yen of ultra-long bonds in December.
(Background: Japan bond crash? 40-year yield “breaks 3.6%” to hit an 18-year high, experts warn: perfect storm approaching)
(Additional context: Japan bond yields soar 1.86% to a 17-year high “causing Bitcoin to crash,” revealing the risks of 600 trillion yen arbitrage unwinding)

Table of Contents

• Tax cut policy triggers bond sell-off
• Weak demand at 20-year auction
• Insurance companies record-breaking sell-off of ultra-long bonds
• Foreign investor share rises, Singapore Exchange to launch JGB futures
• Market focus on Friday’s BOJ decision

Japan’s bond market once again drew global investor attention on Tuesday. The 40-year Japanese Government Bond (JGB) yield rose by 6 basis points intraday, breaking the 4% mark and setting a new record since the bond’s first issuance in 2007, also marking the first time in over 30 years that any Japanese sovereign debt of such duration has reached this level.

Meanwhile, the 20-year yield also surged by 9.5 basis points to 3.35%, hitting a new high since 1997.

Tax cut policy triggers bond sell-off

The trigger for this wave of selling is closely related to Prime Minister Sanae Takaichi’s expansionary fiscal policy. Takaichi officially announced on Monday that a general election will be held on February 8, and pledged to push for a temporary reduction in the food consumption tax if she wins.

Takashi Fujiwara, Chief Fund Manager at Resona Asset Management, said:
“The Japanese bond market is currently in a state of no buyers and persistent selling pressure. However, once expectations of tax cuts are fully priced in, the decline should stabilize before the election.”

Since Takaichi took office last October, yields across all Japanese maturities have risen significantly:

• 20-year yield has increased by 71 basis points
• 30-year and 40-year yields have each risen by nearly 60 basis points

Market participants are closely watching whether this sell-off in Japanese bonds will spill over into global markets. After a poor 20-year JGB auction last year, bond yields from the US to Germany also surged.

Weak demand at 20-year auction

The results of Tuesday’s 20-year bond auction confirmed market caution. The bid-to-cover ratio was only 3.19, well below the previous auction’s 4.1 and the 12-month average of 3.34. Following the auction, Japanese government bond futures continued to come under pressure.

Ataru Okumura, Senior Rate Strategist at SMBC Nikko Securities, said:
“With the likelihood of a consumption tax reduction increasing significantly, investors find it difficult to enter the market at this stage. The 20-year auction was full of uncertainties, making it hard to feel reassured.”

Insurance companies record-breaking sell-off of ultra-long bonds

According to data from the Japan Securities Dealers Association, domestic insurance companies sold a net 8,224 billion yen (about $52.1 billion) of bonds with original maturities over 10 years in December, marking the largest single-month sell-off recorded by Bloomberg since 2004.

This data reflects that even domestic insurers, historically major holders of long-term bonds, are beginning to reassess their investment portfolios.

Foreign investor share rises, Singapore Exchange to launch JGB futures

Despite heavy selling pressure, rising yields have attracted new attention to the Japanese bond market. Masahiko Loo, Senior Fixed Income Strategist at State Street Investment Management, said:
“Breakthrough of the 4% yield on the 40-year bond—hitting a new high since 2007 issuance and significantly above German ultra-long bonds—makes it increasingly attractive for long-term investors domestically and abroad, especially after currency hedging.”

According to data from the Japan Securities Dealers Association, foreign investors currently account for about 65% of JGB cash trading each month. As trading activity in the world’s third-largest bond market intensifies, the Singapore Exchange has announced plans to launch long-dated Japanese government bond futures.

Market focus on Friday’s BOJ decision

In addition to bond market developments, investors are also eyeing the Bank of Japan’s (BOJ) interest rate decision on Friday. The market generally expects rates to remain unchanged, but officials’ increasing concern about the yen’s impact on inflation could provide clues for future rate hikes.

It is worth noting that a weekend poll by Asahi Shimbun showed Prime Minister Takaichi’s approval rating remaining high at 67%, with 52% of respondents believing the ruling coalition should win a majority. However, the formation of the “Centrist Reform League”—a merger of Japan’s largest opposition party and former ruling coalition partners—has added uncertainty to the election, increasing the political risk for Takaichi’s bold gamble.