This morning we have seen another phase on the ongoing car crash that is the Japanese Government Bond or JGB market.
Japan’s currency is weak and its stocks have rallied in recent days, while the Japanese government bond rout continues, in advance of an election called by Prime Minister Sanae Takachi. (The Japan Times)
Rout is an interesting word to use when Japanese media tend to avoid such language, about their own country anyway and later we get more detail.
Japan’s 10-year government bond traded at a yield of 2.24% on Monday for the first time since 1999, partly due to concerns over possible increases in debt issuance if Takaichi’s LDP wins big in the election. ( The Japan Times)
The issues if snything get worse as we look further along the yied curve.
Japan’s 30-Year Treasury Yield spike to 3.55%, the highest level in history.JUST IN : Japan’s 40-Year Treasury Yield jumps above 3.87%, its highest level in history (Barchart)
These are very high levels for a country which was such a leader in the policy of ZIRP with bond yields capped around 0% for so long and NIRP with the official interest-rate at -0.1% for so long. The changes are leading to both concern and speculation about the consequences.
The old bond market adage is that yields will keep rising until something breaks. In 2022/23, rising U.S. yields “broke” several banks by March 2023 (Silicon Valley Bank). Japanese yields are now at a 27-year high and going vertical. When does something “break” in Japan? (Jim Bianco)
There was also the rise in UK bond yields in the autumn of 2022 which broke the LDI style of investment. Actually after many years of us Turning Japanese there are several things familiar to the UK in play in Japan at the moment.
Yield Curve Control
The Bank of Japan issued a 2024 research paper which was an exercise in story telling..
The Bank of Japan (BOJ)’s large-scale monetary easing policies of the past decade or so, such as Quantitative and Qualitative Easing (QQE), which was introduced in April 2013, and Yield Curve Control (YCC) under the framework of QQE with YCC, which was introduced in September 2016, had the effect of boosting the economy and pushing up prices by lowering real interest rates.
Actually it did not boost the economy and prices were pushed up much more by the consequences of the Covid pandemic.But the real issue if we now move forwards to today is that the central planners have now completely lost control of events. There were many on social media and the like who lauded the concept of Yield Curve Control where JGB yields were pegged around 0% for so long and ignored the question I often asked which was “what is the exit strategy”? After all when you buy around 680 trillion Yen of something you need one on a grand scale. On that subject Bob Marley is on repeat.
‘Cause if summer is hereI’m still waiting thereWinter is hereAnd I’m still waiting there
There has been a reduction in purchases by the Bank of Japan.
Meanwhile, in September 2025, the Bank conducted Japanese government bond (JGB) purchases of about 3.7 trillion yen per month. In October 2025, it cut down the monthly purchase amount by about 400 billion yen, to about 3.3 trillion yen per month; this was in accordance with the JGB reduction plan decided at the June 2025 meeting. ( Bank of Japan)
Some nuance is required here as whilst in gross terms it is still a buyer of large amounts the sums involved have been so large that in net terms its position is shrinking as bond mature. So what is a minor tweak has in fact blown up the market.
The Tokyo Whale
There is a consequence if you buy at the top especially if it is one that you artificially created. We know this as it was officially denied by Bank of Japan Governor Ueda.
For example, the FRB, like the Bank of Japan, uses the amortized cost method and discloses
unrealized gains/losses as reference information. As of March 31, 2023, the FRB held substantial unrealized losses on its bond holdings, amounting to 0.9 trillion dollars.
However, this does not directly affect its actual profits/losses, as in the case of the Bank of
Japan. ( FRB is the US Federal Reserve )
That was from my blog of the 2nd of October 2023 where I set out my theme for this area which has turned out to be rather prescient.
As you can see the Bank of Japan ignores marked to market losses. If I owned so many JGBs I might be tempted to do that as well but of course I would go straight to jail. Even under current policy they have large losses at a benchmark yield of 0.75%. Imagine what they would be if Yield Curve Control stopped and interest-rates rose and you quickly come to the conclusion that fears over its balance sheet have been a factor on the Bank of Japan not raising interest-rates.
We would be on a diet of porridge if we did this bit yet again we see that so many frightfully intelligent people doing frightfully intelligent things has led to the worst bond trade in history. There are other malevolent consequences but if we look at the futures contract it fell towards 131 this morning at they were buying at around 155.
Another malevolent consequence is the way that interest-rate rises have been delayed in an attempt to protect the balance sheet. Here are the words of Board Member Tamura san from my post of 6th of February last year.
My sense is that the neutral interest rate would be at
least around 1 percent. Therefore, I think it is necessary for the Bank to raise the short-term interest rate to at least that level by the second half of fiscal 2025
The problem is that depth-charges the balance sheet in terms of carry or yield and that they cannot hide. Even a 0.25% rise in interest-rate is expensive when most of what you are holding yields 0%.
To my mind that is why they looked as selling some of their equity holdings at the end of last year. Whilst they could not hide the bond market carry losses they could offset them via taking capital profits.Except even central bankers may struggle to get away with recording profits whilst ignoring losses.
Fiscal Policy Problems
This is something of a generic in the Western word but Japan is on steroids.
In the record ¥122 trillion yen budget — a ¥7 trillion yen increase from the previous year and ¥1 trillion more in bonds — bond issuance will represent a smaller portion of overall spending compared to the previous year, while a primary balance surplus is projected for the first time in 28 years. ( The Japan Times)
That is from an article trying to claim that the new government is fiscally conservative. Even so that is a large increase in spending and the author mist have wished they had not written it when this was announced.
TOKYO
Japan’s ruling Liberal Democratic Party will pledge to consider suspending the consumption tax on food in its platform for an expected general election to be called by Prime Minister Sanae Takaichi, a senior executive said Sunday. ( Japan Today)
When we now factor in the 240% debt to GDP ratio or the 135% one if we exclude the Bank of Japan we see what damage the higher bond yields are doing. But we also see that the political class carries on regardless.
Comment
A side-effect of this is that the Bank of Japan has ignored the main concern of Japanese workers and consumers from the cost of living crisis. Inflation has been of the order of 3% for a while now which is a lot in a country used to 100 Yen vending machines. Also there will be quite a change in Japanese society as savers have the upper hand after decades of borrowers winning. But in other countries we have seen things go wrong as for example in Switzerland Credit Suisse blew up after trying to adapt to negative interest-rates.
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